The Reserve Bank of India has unveiled a new draft capital framework for banks, aiming to modernise rules related to credit valuation adjustment and enhance financial resilience, with stakeholder feedback invited until August 2026.
The Reserve Bank of India has proposed a fresh capital framework for banks to cover losses linked to credit valuation adjustment, the risk that a derivatives or similar financial contract falls in value when the counterparty’s credit quality deteriorates. The draft would replace the 2011 CVA framework and, the central bank said, bring Indian rules closer to current global banking practice.
Under the proposal, the capital a bank must hold would vary according to the counterparty’s sector and financial strength. Institutions with weaker credit profiles, or no external rating at all, would attract higher charges. The draft sets out different risk weights for sectors and counterparties, including lower weights for stronger financial institutions and higher ones for weaker or unrated entities. RBI has also suggested a simpler calculation route for banks with smaller derivative books, defined as those with aggregate derivative exposure outside central clearing of ₹10 lakh crore or less, although the central bank could withhold that option if it judges the bank’s derivatives risk to be elevated.
Banks would be able to choose between a full standardised calculation method and a simplified version, with the latter intended for institutions that do not use complex instruments to hedge CVA risk. The draft would apply to commercial banks, but not to small finance banks, payment banks or local area banks. The RBI has asked banks, market participants and other stakeholders to submit comments by August 28, 2026, with the new framework proposed to take effect from April 1, 2027.
The move fits into a broader push by the RBI to refresh capital and prudential rules across the financial system. In recent months, the central bank has introduced a prompt corrective action regime for urban co-operative banks, tightened capital adequacy treatment for bank investment portfolios and extended Basel III prudential norms to several national financial institutions, underscoring a wider regulatory effort to strengthen buffers and improve resilience.
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