Reserve Bank of India proposes lower capital requirements for banks

RBI's draft norms propose revised risk weights across corporate, MSME, real estate, and retail exposures, aiming to reduce banks' capital requirements from FY28

The Reserve Bank of India (RBI) has proposed a nuanced and granular risk weighting for exposures to both big and small companies, and real estate -- a move that will result in reduced capital requirements for banks.

 

The proposed directions seek to implement one of the key elements of the global reforms implemented by the Basel Committee on Banking Supervision (BCBS), and have been tailored to the Indian context, the RBI said.

 

These norms amend the standardised-approach framework for calculating capital charges for credit risk.

 

“Overall, the proposed changes are estimated to have a positive impact on the minimum regulatory capital requirements of banks, with certain segments such as MSMEs (micro, small, and medium enterprises), real estate and credit cards exposures being particularly benefited,” the regulator said.

 

The new norms will come into effect on April 1, 2027.

 

For banks’ retail portfolio, which includes the credit card and overdrafts, a 75 per cent risk weighting has been proposed, fund-based and non-fund based, to an individual, a group of persons, or MSMEs. In case the small organisation is part of the group, the reported annual sales of the consolidated group should be less than ₹500 crore. Individual exposure has been capped at ₹7.5 crore.

 

“Banks must ensure that the regulatory retail portfolio is sufficiently diversified to a degree that reduces the risks in the portfolio, warranting the 75 per cent risk weight,” the draft said while proposing that no aggregated exposure to a counterparty could exceed 0.2 per cent of the regulatory retail portfolio.

 

As regards general corporate exposure, for AAA- and AA-rated entities, a base risk weighting of 20 per cent has been proposed.

 

For the BB rating, it is 100 per cent.

 

Specialised lending exposure has been classified under three categories – object finance, commodities finance, and project finance. Risk weightings for rated exposures will be in line with general corporate exposure. For unrated exposures, a 100 per cent risk weighting assigned for object and commodity finance and 130 per cent for project finance in a pre-operational phase.

 

In an operational phase, 100 per cent has been proposed for non-high-quality projects and 80 per cent for high-quality projects.

 

For individuals, the draft has proposed up to two housing loans (will include all existing as well as fresh loans), and they will be treated as having been given for “primary residences”. The risk weighting will be 20 per cent if the loan-to-value (LTV) ratio is less than 50 per cent.

 

For an LTV of 80-90 per cent, 40 per cent has been proposed. There is a higher risk weighting for a third housing loan.

 

For exposures to commercial real estate -- acquisition, development, and construction -- 150 per cent has been proposed and for residential housing it is 100 per cent.