On April 27, 2026, the Reserve Bank of India (RBI) issued the final Master Directions on the Standardised Approach for calculating Capital Charge for Credit Risk. These guidelines align the Indian banking sector with international Basel III standards, enhancing the robustness, granularity, and risk sensitivity of capital requirements. The regulations aim to ensure that the buffer capital held by banks accurately reflects the specific risks embedded in their loan portfolios. Effective Date: April 1, 2027
Applicable Entities
These directions apply to all Scheduled Commercial Banks (including Banking Companies, Corresponding New Banks, and the State Bank of India).
Exclusions: These directions do not apply to Small Finance Banks, Payments Banks, and Local Area Banks.
Specific Changes & Management Action Plan
1. Implementation of Counterparty Due Diligence
Specific Changes Required:
Banks must establish a system to perform independent due diligence on the risk profile of counterparties at origination and at least annually thereafter. Banks can no longer blindly rely on external ratings; if the internal credit assessment reflects a higher risk, the risk weight must be adjusted upwards. Furthermore, climate-related financial risks must be factored into this due diligence.
Banks must establish a system to perform independent due diligence on the risk profile of counterparties at origination and at least annually thereafter. Banks can no longer blindly rely on external ratings; if the internal credit assessment reflects a higher risk, the risk weight must be adjusted upwards. Furthermore, climate-related financial risks must be factored into this due diligence.
Management Action Plan:
- Policy Overhaul: Draft and obtain Board approval for a comprehensive Counterparty Due Diligence Policy.
- ESG Integration: Incorporate climate risk assessment matrices into the standard underwriting scorecard.
- Process Alignment: Implement a mechanism comparing internal risk scores against external rating base weights, ensuring the higher of the two risk weights is applied for capital calculation.
2. Corporate Exposures & Specialised Lending
Specific Changes Required:
All unrated claims on corporates with an aggregate banking system exposure of over ₹500 crore will now attract a punitive 150% risk weight. Additionally, the RBI has introduced a granular framework for Specialised Lending (Project/Object Finance):
All unrated claims on corporates with an aggregate banking system exposure of over ₹500 crore will now attract a punitive 150% risk weight. Additionally, the RBI has introduced a granular framework for Specialised Lending (Project/Object Finance):
- Pre-operational phase: 130% RW
- Operational phase: 100% RW
- High-Quality Operational Projects (meeting strict escrow and cash flow criteria): 80% RW
Management Action Plan:
- Client Outreach: Identify all unrated corporate borrowers with exposure > ₹500 Cr. Launch a targeted campaign mandating them to obtain external credit ratings to avoid capital penalties.
- Portfolio Reclassification: Conduct an immediate audit of the infrastructure/project finance book. Tag assets accurately as “Pre-operational” or “Operational.”
- Covenant Review: Restructure existing operational project loans to meet “High-Quality” criteria (e.g., ensuring Trust and Retention Account mechanisms and step-in rights) to free up 20% capital charge.
3. Retail & MSME Portfolio Granularity
Specific Changes Required:
To qualify for the 75% “Regulatory Retail Portfolio” risk weight, strict criteria apply: Max aggregate exposure per counterparty is ₹10 crore, and no single exposure can exceed 0.2% of the overall retail portfolio. Unrated MSMEs meeting this criteria get a 75% RW, while other unrated MSMEs get 85%. Credit card “transactors” (full repayment for 12 months) are now distinctly recognized for lower capital charge.
To qualify for the 75% “Regulatory Retail Portfolio” risk weight, strict criteria apply: Max aggregate exposure per counterparty is ₹10 crore, and no single exposure can exceed 0.2% of the overall retail portfolio. Unrated MSMEs meeting this criteria get a 75% RW, while other unrated MSMEs get 85%. Credit card “transactors” (full repayment for 12 months) are now distinctly recognized for lower capital charge.
Management Action Plan:
- IT Systems Enhancement: Automate the 0.2% granularity check in the core banking/capital computation system to dynamically classify loans.
- Credit Card Tagging: Update card management systems to auto-tag accounts as “transactors” based on 12-month payment histories to claim capital relief.
- MSME Data Scrub: Verify the group-level turnover of MSME clients to ensure they fall below the ₹500 crore threshold for preferential RW treatment.
4. Granular Real Estate Exposures
Specific Changes Required:
Risk weights for real estate are now strictly tethered to the Loan-to-Value (LTV) ratio and the source of repayment.
Risk weights for real estate are now strictly tethered to the Loan-to-Value (LTV) ratio and the source of repayment.
- Housing loans have scaled RWs (e.g., LTV ≤ 50% = 30% RW; LTV > 80% to 90% = 40% RW).
- Third housing loans onwards face stiffer capital charges.
- A clear distinction is made between loans repaid via economic activity vs. loans repaid primarily from the property’s rental or sale cash flows (which attract higher RWs).
Management Action Plan:
- Valuation Policy: Enforce strict, independent property valuation norms excluding speculative price increases. Lock down LOS to calculate LTVs solely on effective purchase price at origination.
- Data Capture: Modify application forms to capture whether the property is the 1st/2nd or 3rd+ home for the borrower, syncing with credit bureau data.
- Cash Flow Assessment: Train underwriters to clearly document the primary source of repayment to ensure correct categorization between economic vs. property-dependent cash flows.
5. Revisions to Off-Balance Sheet CCFs
Specific Changes Required:
Unconditionally Cancellable Commitments (UCC), which previously attracted a 0% Credit Conversion Factor (CCF), will now attract a 5% CCF initially, rising to 10% after 3 years.
Unconditionally Cancellable Commitments (UCC), which previously attracted a 0% Credit Conversion Factor (CCF), will now attract a 5% CCF initially, rising to 10% after 3 years.
Management Action Plan:
- Capital Impact Study: Run a quantitative impact study (QIS) on existing undrawn credit lines to estimate the new capital drag.
- Pricing Strategy: Revise the pricing mechanism for offering unconditionally cancellable limits to large corporates to offset the new capital holding costs.
6. CRA Performance Linkage & “Issuer Not Cooperating”
Specific Changes Required:
Risk weights must be adjusted based on the Observed Default Rate (ODR) of the Credit Rating Agency (CRA). If a CRA’s default rate exceeds RBI thresholds, the exposure’s risk weight bumps to the next higher bucket.
Furthermore, “Issuer Not Cooperating” (INC) ratings now carry a 100% RW floor for the first 6 months, escalating to a punitive 150% RW thereafter.
Risk weights must be adjusted based on the Observed Default Rate (ODR) of the Credit Rating Agency (CRA). If a CRA’s default rate exceeds RBI thresholds, the exposure’s risk weight bumps to the next higher bucket.
Furthermore, “Issuer Not Cooperating” (INC) ratings now carry a 100% RW floor for the first 6 months, escalating to a punitive 150% RW thereafter.
Management Action Plan:
- System Automation: Integrate RBI’s ODR threshold tables directly into the Risk/Capital computation engine to auto-adjust weights based on the CRA used.
- Early Warning System (EWS): Configure the EWS to trigger immediate alerts when an account is marked INC.
- Collections & Restructuring: Establish a task force to resolve INC cases within the 6-month grace window before the 150% RW penalty is applied.
7. Equity Investments in Funds (MFs, AIFs, REITs)
Specific Changes Required:
The RBI has introduced three hierarchical approaches for calculating Risk-Weighted Assets for investments in pooled funds:
The RBI has introduced three hierarchical approaches for calculating Risk-Weighted Assets for investments in pooled funds:
- Look-Through Approach (LTA): Requires highly granular data on underlying fund assets (lowest capital charge).
- Mandate-Based Approach (MBA): Based on the fund’s regulatory mandate.
- Fall-Back Approach (FBA): Subject to full capital deduction / 1250% RW if LTA or MBA cannot be used.
Management Action Plan:
- Data Partnerships: Sign data-sharing and certification agreements with fund houses and custodians to ensure the periodic receipt of granular asset-level data required for the LTA.
- Treasury Rebalancing: Liquidate or re-allocate investments in funds that refuse to provide adequate transparency, as the FBA will render those investments capital-prohibitive.