RBI finalises new risk weight norms

MUMBAI: The Reserve Bank of India (RBI) on Monday issued final directions on risk weights for retail, corporate and sovereign exposures, linking capital requirements more closely to borrower risk profiles. The norms, effective April 1, 2027, are expected to optimise capital allocation across the banking system.

Under the revised framework, both fund-based and non-fund-based exposures can qualify as part of the regulatory retail portfolio and attract a 75% risk weight.

To be eligible, loans must be extended to individuals or small businesses with turnover up to ?500 crore, fall under standard retail products, remain within a Rs 10 crore exposure cap per borrower, and form part of a diversified portfolio where no single borrower accounts for more than 0.2%.

Eligible categories include home loans, term loans, education loans and small business credit. Importantly, the RBI has extended favourable treatment to credit card receivables that are fully paid before the due date, effectively lowering their capital charge.

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This move is aimed at encouraging timely repayments and improving credit discipline, while distinguishing them from riskier revolving balances.

At the same time, the central bank has tightened exclusions, keeping most personal loans, non-transactor credit card dues, capital market exposures, derivatives and real estate-linked loans outside the regulatory retail category. These exposures will attract higher capital requirements.Also Read: RBI asks banks to report overseas rupee OTC derivative contracts to CCIL

Unsecured personal loans and revolving credit card balances will continue to carry a 125% risk weight, while other retail exposures that do not meet the qualifying criteria will generally attract a 100% risk weight. The RBI has also retained the flexibility to increase the 75% risk weight for specific banks if asset quality deteriorates.

For housing loans, the norms introduce a loan-to-value LTV-linked framework, with lower risk weights of 20-40% for individual borrowers, reflecting relatively low stress in the segment. However, higher risk weights have been prescribed for borrowers with multiple housing loans, as well as for real estate exposures more broadly, with residential and commercial real estate attracting 100% and 150% risk weights, respectively.