RBI issues new capital rules for banks' derivative counterparty risk, effective April 2027

The Reserve Bank of India issued the Reserve Bank of India (Commercial Banks – Credit Valuation Adjustment Framework) Directions, 2026, under Section 35A of the Banking Regulation Act, 1949, finalising draft directions floated in August 2026 after public consultation. The Directions apply to all commercial banks except Small Finance Banks, Payments Banks and Local Area Banks, and take effect on 1 April 2027, when they repeal the existing provision on this subject in the Prudential Norms on Capital Adequacy Directions, 2025. Credit Valuation Adjustment, or CVA, is the capital a bank must set aside against the risk that a derivative counterparty defaults before the contract matures.

Under the new framework, banks whose total non-centrally-cleared derivative exposure is below Rs 10 lakh crore may use a simpler 'alternate treatment' that charges the full counterparty-credit-risk capital with no credit for hedges, while larger or higher-risk banks must use a 'Basic Approach' that lets them recognise eligible credit-default-swap hedges and applies sector- and credit-quality-based risk weights to each counterparty. Transactions with qualifying central counterparties and securities financing transactions are excluded from the charge. Banks must also make new Pillar 3 disclosures under this framework and maintain board-approved policies for classifying counterparties by sector.