The final directions on credit risk capital charge released recently by the Reserve Bank of India (RBI) mark a significant evolution in the prudential regulatory framework governing Indian banks.
RBI has considered the suggestions on the Draft guidelines for Credit risk assessment, and, effective April 1, 2027, the Capital Charge for Credit Risk – Standardised Approach Directions, 2026, will align India’s credit risk capital framework with the Basel III regulations, with a focus on enhancing risk sensitivity, comparability and resilience of the banking system.
We look at some of the key changes here.
Capital charge for credit risk – standardised approach
Under the earlier norms, credit risk capital was part of a wider capital adequacy framework. The new directions standardise this approach and isolate it, introducing explicit requirements for due diligence, internal risk assessment alignment, and enhanced documentation
Sovereign exposures, domestic and foreign PSEs
For sovereign exposures, the broad risk weight structure remains intact, with central government exposures continuing to attract 0% risk weight.
The new directions introduce greater granularity in treatment of government guarantees, though. Schemes such as CGTMSE and NCGTC are now governed by clearer rules around eligibility, first-loss structures, and their interaction with Stage 3 (non-performing) classifications.
Similarly, while foreign sovereign exposures retain their rating-based risk weight framework, additional safeguards such as risk floors for regional governments and host supervisor conservatism have been introduced.
Notable simplification is seen in the treatment of public sector entities (PSEs) – to be uniformly treated as corporate exposures – eliminating earlier distinctions between domestic and foreign PSEs.
In contrast, treatment of multilateral development banks (MDBs) has become more favourable, with eligible MDB exposures now attracting a 0% risk weight, compared with 20% earlier – an important capital relief measure.
The framework for bank exposures has been significantly rationalised. Previously, domestic bank exposures depended on regulatory capital metrics such as CET1 and capital conservation buffers, while foreign bank exposures followed a rating-based approach. The new directions harmonise this into a single rating-based scale, with preferential treatment for short-term exposures and the introduction of sovereign floors for certain cross-border exposures.
Corporate exposures
For corporate exposures, RBI has enhanced risk sensitivity by recalibrating risk weight buckets. While highly rated exposures continue to enjoy low risk weights, mid-tier ratings such as BBB now attract lower capital (75% vs 100% earlier). The threshold for penal risk weight on large unrated exposures has been increased to Rs 500 crore from Rs 200 crore. Short-term ratings have also been streamlined.
Retail exposures
The treatment of retail exposures has been liberalised in some respects. While the standard 75% risk weight remains unchanged, eligibility thresholds have been expanded significantly, with turnover limits increased (to Rs 500 crore from Rs 50 crore) and exposure caps raised (to Rs 10 crore from Rs 7.5 crore). However, certain products, such as personal loans and non-transactor credit cards, now attract a higher risk weight of 125%, indicating a more cautious stance on unsecured retail credit.
Specialised lending
One of the most significant additions is the introduction of new asset classes, including specialised lending and MSME exposures. Specialised lending, such as project finance and object finance, now has distinct risk weight categories based on operational status and quality, ranging from 80-100% for project finance and 100% for object finance.
MSMEs
MSMEs have been carved out as a separate category, with differentiated treatment for rated (same as Corporate) and unrated exposures (retail 75%, others 85%), as well as large MSMEs (150%), thereby improving risk alignment for a critical segment of the economy.
Real estate
A major overhaul is in real estate exposures, particularly housing loans. The earlier slab-based approach has been replaced with a granular loan-to-value (LTV)-linked framework, resulting in lower risk weights for low-LTV loans but higher sensitivity for riskier exposures. First two houses would see risk weights of 20–40% and third onwards 30%–60%, with additional 5% risk weight if the loan is above Rs 3 crore.
Commercial real estate has also been reclassified, with higher risk weights for acquisition, development, and construction exposures and a clearer distinction based on repayment dependence.
For claims secured by residential properties with repayment from economic activity, risk weights are in the 20-40% range. Where repayment is from the underlying property, risk weights are in the 30-75% range.
For claims secured by commercial properties with repayment from economic activity, risk weights will be lower of 60% or counterparty risk weight; and where repayment is from the underlying property, risk weights are in 70-110% range.
For claims secured by other real estate with repayment from economic activity, risk weights will be dependent on counterparty (individual qualifying loan at 75%, or 125% otherwise; MSME 85% or risk weight; others – risk weight).
Non-performing assets (NPA)
Treatment of NPA has been aligned with the concept of Stage 3 assets, with the core risk weight structure retained, but certain concessions, particularly for residential mortgages, have been withdrawn (residential real estate NPAs fixed at 100%).
AIF and fund exposure
Flat risk weight approach for alternative investment fund (AIF) and fund exposures has been replaced with a sophisticated hierarchy involving look-through, mandate-based and fallback deduction approaches, aligning India with global best practices.
Off-balance sheet exposure
Another important shift is the tightening of off-balance sheet exposures. Credit conversion factors (CCF) have been increased, including the introduction of a non-zero CCF for unconditionally cancellable commitments, signalling a more conservative stance on contingent risks.
Ratings framework
Finally, RBI has strengthened the framework for external ratings, introducing stricter rules on rating usage and incorporating an unexpected loss-based downgrade mechanism linked to observed default rates. Enhanced Pillar 3 disclosures further reinforce transparency. There is reduced scope for cherry picking ratings that will be beneficial to the bank in terms of keeping capital.
Conclusion
These directions represent a pivotal step in strengthening the banking sector. By introducing more risk-sensitive capital requirements, enhancing due diligence and incentivising prudent lending practices, the regulation is expected to improve resilience and transparency.
However, these benefits come with trade-offs in the form of higher compliance costs and potential constraints on certain types of lending. Ultimately, banks that successfully adapt their risk management, capital planning, and business strategies will be best positioned to thrive in this evolving regulatory landscape.
Views expressed by: Siddharth Shah, Director, Crisil Intelligence, and Rohan Sen, Associate Director, Crisil Intelligence
