RBI drops its separate limits on non-option derivative contracts for small finance and commercial banks

The Reserve Bank of India has withdrawn the regulatory ceiling it had placed on non-option derivative contracts for both small finance banks and scheduled commercial banks. Two notifications dated 19 October 2026 — the Reserve Bank of India (Small Finance Banks – Miscellaneous) Amendment Directions, 2026 and the Reserve Bank of India (Commercial Banks – Miscellaneous) Second Amendment Directions, 2026 — each delete Section C, 'Limits for Non-Option Derivative Contracts', from Chapter IV of the respective 2025 Directions governing these banks. Both notifications state only that the identified section 'stands deleted', without substituting any replacement limit.

Each amendment is issued under Section 35A of the Banking Regulation Act, 1949, which lets the RBI issue binding directions to banking companies where it considers this necessary or expedient in the public interest, and each takes effect immediately on issuance. Non-option derivative contracts, such as interest rate and currency swaps and forward rate agreements, are hedging instruments banks use to manage interest-rate and currency risk; a dedicated regulatory limit on their use is a prudential safeguard against excessive exposure. By removing that limit for both categories of banks in a single stroke, the RBI gives commercial banks and small finance banks more flexibility to enter into such contracts, subject to whatever risk-management and board-level controls apply under the RBI's other prudential norms.