Capital Charge for

Credit Risk –
Standardised
Approach

RBI Draft Guidelines

-VAIB HAV PANDE Y

Background

• The BCBS in its final ‘Basel III framework (Basel III: Finalising post-crisis reforms in
December 2017)’ also known as Basel 3.1 has prescribed a revised framework that would
facilitate arriving at capital ratios for banks in a comparable and risk-sensitive manner.
• RBI has hence decided to implement the BCBS prescribed changes in the Standardised
Approach (SA) for credit risk for banks under its jurisdiction.
• These instructions shall come into effect from April 01, 2027.
Exposures Exposure Risk Weights

to Domestic Central government,

guaranteed claims
Central Government 0%

Sovereigns State Governments and investments in State

Government securities
0%

claims guaranteed by the State Governments 20%

claims on the Reserve Bank of India and DICGC 0%
CGTMSE, CRGFTLIH, NCGTC backed by an 0%
unconditional and irrevocable guarantee
provided by GoI
ECGC 20%
Exposures to Foreign Sovereigns and Foreign Central Banks

S&P*/ AAA to A BBB BB to B Below B Unrated

Fitch AA
ratings • Risk weights shall be as per the
Moody’s Aaa to A1 to Baa1 Ba1 to Below Unrated ratings assigned by international
ratings Aa3 A3 to B3 B3
Baa3 rating agencies.

Risk 0 20 50 100 150 100

weight (%)
Exposures to Public Sector Entities (PSEs)

S&P*/ AAA to A BBB BB to Below Unrated • Exposures to domestic public sector

Fitch AA B B
ratings entities and local government bodies
Moody’s Aaa to A1 to Baa1 Ba1 to Below Unrated shall be risk weighted in a manner
ratings Aa3 A3 to B3 B3
Baa3 similar to claims on Corporates.
Risk 20 50 50 100 150 100 • Exposures to foreign PSEs shall be
weight
(%) risk weighted as per the rating
assigned by the international rating
agencies.
 Exposures to MDBs, BIS and IMF
• Exposures to BIS, IMF and certain eligible
S&P*/ AAA to A BBB BB to Below Unrated
Fitch AA B B
Multilateral Development Banks (MDBs)
ratings which fulfil the BCBS criteria shall be
Moody’s Aaa to A1 to Baa1 Ba1 to Below Unrated assigned a uniform 0% risk weight.
ratings Aa3 A3 to B3 B3
Baa3
• Exposures to all other MDBs shall be risk
Risk 20 30 50 100 150 50 weighted as per the rating assigned by the
weight international rating agencies.
(%)

• Changes from earlier Standardised Approach

Earlier, exposures to BIS, IMF and eligible Multilateral Development Banks (MDBs) attracted a uniform
risk weight of 20%. Now these attract uniform 0% risk weight. Further, other MDBs shall now be
assigned RWs based on their credit rating.
Exposures to Banks
• Exposures to counterparty banks shall be risk weighted as per the following approaches:

• External Credit Risk Assessment Approach (ECRA): It applies to all exposures that are rated by external credit rating agency.
• Standardised Credit Risk Assessment Approach (SCRA): It applies to exposures that are unrated.
External Credit Risk Assessment Approach (ECRA)
• Banks shall assign to their rated bank exposures, the “base” risk weights based on the external ratings.
• Banks must perform due diligence to ensure that the external ratings appropriately and conservatively reflect the creditworth iness of
the counterparty banks.
• If due diligence analysis carried out by the bank reflects higher risk characteristics than that implied by the external rati ng bucket, then
the bank may assign a risk weight at least one bucket higher than the “base” risk weight determined by the external rating.
• Due diligence analysis must never result in the application of a lower risk weight than that determined by the external ratin g.

External rating of AAA to AA A BBB BB to B Below B

counterparty

“Base” risk weight 20 30 50 100 150

(%)
Exposures to Banks
Standardised Credit Risk Assessment Approach (SCRA)
• Under SCRA, a bank is required to classify unrated exposures into one of the three risk weight buckets viz., Grade A, Grade B and Grade C as per
the following criteria:

• Grade A refers to exposures to counterparty bank, where the counterparty has adequate capacity to meet their financial commitments. The
counterparty banks classified under Grade A must meet the applicable minimum CET1, applicable capital conservation buffer (CC B) ratio and the
minimum leverage ratio.

• Grade B refers to exposures to counterparty bank, where the counterparty is subject to substantial credit risk, such as repayment cap acities that
are dependent on stable or favourable economic or business conditions. The counterparty banks classified under Grade B must m eet the
applicable minimum CET1 and minimum leverage ratio but may not meet the applicable CCB ratio.
• Grade C refers to higher credit risk exposures to counterparty bank, where the counterparty has material default risks and limited ma rgins of
safety. For these counterparties, adverse business, financial, or economic conditions are very likely to lead, or have led, t o an inability to meet
their financial commitments. The counterparty banks that do not meet the applicable minimum CET1 and/or minimum leverage rati o shall also be
classified under Grade C.
• The risk weights for claims on unrated banks as per SCRA are as under:
Credit Risk assessment Grade A Grade B Grade C
grade

“Base” risk weight (%) 40% 75% 150%

Exposures to Banks
Changes from earlier Standardised Approach
• Earlier Risk Weights were based on CRAR level of investee bank and investment above or
below 10% limit for Scheduled/Non Scheduled Banks. Now rating based approach has been
introduced.
• Additional Due diligence requirements have been introduced for rated exposure which were
earlier absent.
• Introduction of additional SCRA requirements for unrated exposures with grade wise
differentiated Risk Weights.
Exposures to Corporates
• The corporate exposure has been differentiated into following:
• General Corporate Exposures
• Specialised Lending Exposures

• General Corporate Exposures

• Exposures to corporates shall be assigned risk weights as per the “base” risk weights as follows:
External AAA to A BBB BB Below BB Unrated
rating of AA
counterparty

“Base” risk 20 50 75 100 150 100

weight (%)

• The risk weights shall be adjusted for the one-year probability of default for each rating category published by the respective ECRAs and the due
diligence carried out by the banks.
• If due diligence analysis carried out by the bank reflects higher risk characteristics than that implied by the external rati ng bucket, the bank may
assign a risk weight at least one bucket higher than the risk weight determined by the external rating.

• Due diligence analysis must never result in the application of a risk weight lower than the applicable risk weight as per the external credit rating
agencies.
Exposures to Corporates

Changes from earlier Standardised Approach

• Changes in Risk Weights of certain rating grades: AA (from 30% to 20%), BBB (from 100% to
75%) and BB (from 150% to 100%).
• Additional Due diligence requirements have been introduced for externally rated exposure
which were earlier absent.
Exposures to Corporates
Specialised Lending Exposures
• Corporate exposures falling under Specialised Lending shall be classified into (i) Object finance; (ii) Commodities finance; and (iii)
Project finance.
Project Finance
Specialised Object and Pre- Operational phase
lending commodities operational High Quality
Non-High
subcategory finance phase Projects
Quality Projects
Risk weight (%) 100 130 100 80

• Under Project Finance, projects shall be classified under: (i) Pre-operational phase, or (ii) Operational phase. During the operational
phase, a project that is able to meet its financial commitments in a timely manner and its ability to do so is assessed to be robust
against adverse changes in the economic cycle and business conditions will be classified as High Quality Projects. Such proje cts must
also meet the specified criteria.
Changes from earlier Standardised Approach
• Specific Risk Weights have been provided for Specialised lending which were earlier not considered separately but were under
corporate exposure.
• Differential Risk Weights have been provided for project finance based on operational phase and quality of projects.
Exposures to Subordinated debt, equity and other
capital instruments
Exposure Type Equity Exposures Speculative Subordinate debt
Unlisted Equity and other Capital
Instruments
Risk Weight (%) 250 400 150

Changes from earlier Standardised Approach

• Separate Risk Weights for Equity and Speculative Unlisted Equity.
Retail Exposures
Qualifying Criteria for regulatory retail portfolio
• Orientation Criterion: The exposure (both fund based and non-fund based) is to an individual person or persons
or to MSMEs.
• Product Criterion: The exposure takes the form of revolving credits and lines of credit (including credit cards
and overdrafts – which qualify as transactors), term loans and leases (e.g. instalment loans and leases),
commitments and facilities for MSMEs and student and educational loans.
• Low value of individual exposures: The maximum aggregated exposure to one counterparty cannot exceed an
absolute threshold of ₹7.5 crore.
• Granularity criterion: 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. No aggregated exposure to one
counterparty can exceed 0.2 per cent12 of the overall regulatory retail portfolio.
Retail Exposures
Claims included in regulatory retail portfolio shall be assigned a risk weight of 75 per cent.
• The following claims, both fund-based and non-fund-based, shall be excluded from the regulatory retail portfolio.
• Personal Loans (excluding education loans meeting regulatory retail criteria);
• Credit card receivables other than those which qualify as transactors;
• Capital Market Exposures;
• Real Estate Exposures as per section 16 of these guidelines;
• Loans and Advances to bank’s own staff which are fully covered by superannuation benefits and / or mortgage of flat/ house.

Changes from earlier Standardised Approach

• Segregation of revolvers and transactors with lower Risk weights for transactors.

• Granular categorisation of different retail exposures.

Exposure to Micro, Small and Medium Enterprises
(MSMEs)
• If the MSME is part of a group and if the reported annual sales for the consolidated group of which the MSME is
a part, is greater than ₹500 crore for the most recent financial year then it shall attract the risk weight which is
applicable on corporate exposures.
• Rated exposures to MSMEs shall be risk weighted as per guidelines pertaining to Corporate.

• Exposure to MSMEs that meet the criteria of regulatory retail portfolio shall be risk weighted at 75 per cent.
• Unrated MSME not meeting the regulatory retail criteria exposures shall be risk weighted at 85 per cent.

Changes from earlier Standardised Approach

• New MSME sub class carved out and differential risk weights introduced.

• An explicit group sales threshold (Rs 500 crore) specified.

Real Estate Exposures
The exposures may be categorised as follows:
• Housing Loans to Individuals

• Commercial Real Estate – Acquisition, Development and Construction Exposures - CRE(ADC)

• Other Claims secured by Real Estate

• Housing Loans to Individuals: Housing loans to individuals shall be for construction or acquisition of housing units.

• Housing Loans to Individuals – Up to two loans

LTV ≤ 50% >50% to ≤ 60% > 60% to ≤ 80% > 80% to ≤ 90%
Risk Weight (%) 20 25 30 40

• Housing Loans to Individuals – Third loan onward

LTV ≤ 50% >50% to ≤ 60% > 60% to ≤ 80% > 80% to ≤ 90%
Risk Weight (%) 30 35 45 60
Real Estate Exposures
• Commercial Real Estate Exposures – Acquisition, Development and Construction – CRE (ADC)

• Loans to commercial entities (including proprietorship firms and HUFs) for acquisition (wherever permitted)
and development of land, and/or construction of commercial or residential real estate projects where the
repayment is dependent on the underlying property such as renting, leasing the units or; selling the units of the
project; selling the complete, or part of, the project, etc. shall be classified as CRE(ADC) exposures.
• Such loans for construction of residential complexes or integrated projects (residential plus commercial)
having at least 90 per cent Floor Space Index for residential real estate, and which meet certain prescribed
criteria, shall be sub-classified as CRE-RH (ADC) (Commercial Real Estate – Residential Housing (ADC)).
• Commercial Real Estate Exposures (ADC)

Category CRE-RH (ADC) Other CRE (ADC)

Risk weight (%) 100 150
Real Estate Exposures
• Other Claims secured by Real Estate: All other loans not categories as either housing loans to individuals or
CRE-ADC shall be classified under this category.
• Claims secured by residential properties – Repayment from economic activity
LTV ≤ 50% >50% to ≤ 60% > 60% to ≤ 80% > 80% to ≤ 90%
Risk Weight (%) 20 25 30 40

• Claims secured by residential properties – Repayment primarily from underlying property

LTV ≤ 50% >50% to ≤ 60% > 60% to ≤ 80% > 80% to ≤ 90% > 90% to ≤ 100%
Risk Weight (%) 30 35 45 60 75

• Claims secured by commercial properties – Repayment from economic activity

LTV ≤ 60% > 60%
Risk Weight (%) Lower of 60% or RW for the Counterparty RW for the Counterparty

• Claims secured by commercial properties – Repayment primarily from underlying property

LTV ≤ 60% > 60% to ≤ 80% > 80% to ≤ 100%
Risk Weight (%) 70 90 110

• Claims secured by Other Real Estate – Repayment from economic activity

Counterparty Type → Individuals MSME Others
Risk Weight (%) 75 85 RW applicable to the Counterparty

• Claims secured by Other Real Estate – Repayment primarily from underlying property: 150%
Specified Categories
• Personal loans (excluding education loans meeting the regulatory retail criteria and transactor credit card
receivables, housing loans, vehicle loans, microfinance loans), shall attract a risk weight of 125 per cent.
• Credit card receivables other than those which qualify as transactors under regulatory retail portfolio asset
class shall attract a risk weight of 125 per cent. “Transactors” mean obligors in relation to facilities such as
credit cards and charge cards where the balance has been repaid in full at each scheduled repayment date for
the previous 12 months. Obligors in relation to overdraft facilities would also be considered as transactors if
there have been no drawdowns over the previous 12 months.
• All other consumer credit exposure shall attract a risk weight of 100 per cent, unless specified otherwise.

• Microfinance loans that are in the nature of consumer credit and are not eligible for classification under
‘regulatory retail’ shall attract a risk weight of 100 per cent.
Changes from earlier Standardised Approach
• Segregation of revolvers and transactors with lower Risk weights for transactors.

• Granular categorisation of different retail exposures.

Unhedged Foreign Currency Exposure

• Unhedged foreign currency exposures of

Potential Loss/EBID Unhedged Foreign
entities28 shall attract incremental capital (%) Currency Exposure
requirements for bank exposures to entities Upto to 75 per cent 0
with unhedged foreign currency exposures (i.e. More than 75 per 25 per cent increase in the
cent risk weight
over and above the present capital
requirements):
Off-Balance Sheet Items
Changes from earlier Standardised Approach
• 10% CCF on Unconditionally Cancellable Commitments (UCC). Earlier it was zero.

• 40% uniform CCF for other commitments and removal of maturity based CCF.

• CCF for other commitments 10 shall be staggered in two stages, as follows:

Instruments CCF (till 3 years from the date of CCF (after 3 years from the date of
implementation of this circular) implementation of this circular)
Other commitments (e.g., formal standby 30% 40%
facilities and credit lines) with an original
maturity of up to one year
Other commitments (e.g., formal standby 40% 40%
facilities and credit lines) with an original
maturity of over one year
Unconditionally Cancellable Commitments 5% 10%
(UCC)
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