RBI standardised approach credit risk 2026: underwriter guide

What is RBI’s 2026 standardised approach for credit risk?

From April 1, 2027, commercial banks calculate credit risk capital on banking book exposures under the Reserve Bank of India (Commercial Banks - Capital Charge for Credit Risk – Standardised Approach) Directions, 2026 (RBI/DOR/2026-27/397, dated April 27, 2026), called the 2026 Directions below. Most personal loans carry a 125% risk weight. Home loans run on loan-to-value (LTV) tables from 20% to 60%, before add-ons. Unrated MSME loans carry 75% or 85%, with a 150% exception for the largest.

A risk weight is the percentage applied to an exposure to arrive at its risk-weighted assets (RWAs), the figure that feeds a bank’s capital ratios.

Which lenders do the 2026 Directions cover?

Paragraph 3 of the 2026 Directions applies them to commercial banks: banking companies other than small finance banks, payments banks and local area banks, plus corresponding new banks and State Bank of India. No other lender type is in that definition, so do not read these risk weights across to other books. NBFCs appear only as counterparties of the bank, under the corporate class in paragraph 12.

On April 1, 2027, the corresponding provisions of the Reserve Bank of India (Commercial Banks - Prudential Norms on Capital Adequacy) Directions, 2025 stand repealed (paragraph 40).

The 2026 Directions do not set old and new risk weights side by side, except for the commitment conversion factors covered below. For any other comparison, read the 2025 Directions directly.

Why do the 2026 Directions matter for underwriters?

The risk weight under the 2026 Directions depends on facts captured in the credit file: repayment source, LTV inputs, the number of housing loans, rating status and group exposure. If those facts are wrong or missing, the capital number is wrong too.

The file also has to stand up to supervisory review. Under paragraph 6 of the 2026 Directions, banks need a due diligence system that:

• Covers the counterparty’s risk profile at origination and at least annually after that.
• Keeps the assigned risk weight broadly aligned with the bank’s internal credit assessment.
• Never produces a risk weight below the base risk weight from the external rating.
• Works at solo entity level for group borrowers, while taking group support and group problems into account.
• Can be shown to the supervisor as performed under the Board-approved policy.

How are risk-weighted assets calculated under the 2026 Directions?

1. Classify the exposure into its class under Chapter III of the 2026 Directions.
2. Take the exposure net of specific provisions, including partial write-offs (paragraph 5(2)).
3. Apply the prescribed risk weight, or the one mapped from a rating by an eligible credit rating agency (ECRA).
4. Multiply: RWA = exposure amount x risk weight.
5. For off-balance sheet items, first multiply the notional amount by the credit conversion factor (CCF) to get the credit equivalent amount, then apply the risk weight (paragraph 22(1)).
6. Recognise credit risk mitigation (CRM), meaning eligible collateral, netting or guarantees, only where Chapter V is met.

What is the regulatory retail test?

Regulatory retail carries 75% under paragraph 14 of the 2026 Directions, and the test decides much of the MSME outcome. An exposure must meet all four criteria.

For the ₹10 crore test, exposure is the higher of sanctioned limit and outstanding. For term and EMI loans with no redraw, exposure is the actual outstanding (paragraph 14(5)).

The granularity test is run across the portfolio, so a single file cannot settle it. Paragraph 14(6) also lets the supervisor consider whether a bank’s retail credit quality warrants more than 75%.

What risk weight applies to personal loans?

Personal loans are excluded from regulatory retail under paragraph 14(4) of the 2026 Directions, other than education loans that meet the criteria. The definition of personal loans comes from RBI’s Banking Statistics I (Harmonised Definitions).

A transactor is an obligor who has repaid the card balance in full at each scheduled date, including the three-day grace period, for the previous 12 months. Vehicle loans and microfinance loans are carved out of the 125% line. Loans fully secured by real estate move to paragraph 16.

What risk weight applies to MSME term loans?

Paragraph 15 of the 2026 Directions sets the order for MSME exposures. MSME means an enterprise as defined in the MSMED Act, 2006.

The adjustment uses the average one-year observed default rate (ODR) that the agency publishes for each rating category. If the ODR exceeds the reference range in Table 21, the risk weight moves one bucket higher. AAA moves to 30% (paragraph 27(2)).

When an MSME loan is fully secured by real estate, the security type and the repayment source together pick the table in paragraph 16(7).

Repayment is primarily from the property when rent, lease or sale cash flows exceed 50% of the periodic loan servicing amount. Personal loans to individuals against existing property use the same tables (paragraph 16(7)).

Credit guarantee cover changes the calculation for a bank recognised as an eligible member lending institution. Under paragraph 7(4), CGTMSE-guaranteed facilities get 0% only up to the maximum permissible claim, if the guarantee meets Chapter V. The residual takes the counterparty risk weight. Under a portfolio-level guarantee, any first-loss portion borne by the lender is deducted from capital in full. Schemes launched on or after September 7, 2022 must also settle eligible claims within thirty days of lodgment and allow lodgment within sixty days of default.

Paragraph 7(6) applies these risk weights only while the asset is standard, and paragraph 7(7) only if it is denominated and funded in rupees. Separately, RBI may raise the standard risk weight for unrated MSME claims on default experience (paragraph 15(2)).

What risk weight applies to home loans?

Paragraph 16(5) of the 2026 Directions sets risk weights for housing loans to individuals by LTV and loan count, if the paragraph 16(2) qualifying conditions are met.

Three rules move a home loan off these base numbers or between columns:

• Loan count: counted at banking system level, including co-applicants, and excluding fully repaid loans.
• Size add-on: five more percentage points if total loan outstanding is ₹3 crore or above.
• Construction timelines: 150% for as long as the exposure breaches the timelines in the first proviso to paragraph 16(5)(i). For plot and self-construction cases, that means starting within a year and finishing within five years of first disbursement.

The LTV inputs need care, and the rules sit in different parts of paragraph 16(1):

• Numerator (paragraph 16(1)(iv)(a)): total loan outstanding, including any undrawn committed amount, gross of provisions and mitigants. The one exception is lien-marked deposits that meet the netting requirements.
• Denominator (paragraph 16(1)(iv)(b)): the value at origination, unless revised down. For a purchase, the value cannot exceed the effective purchase price (Explanation (b) to paragraph 16(1)(ii)).
• Upward revision (paragraph 16(1)(iv)(b) and (c)): after a downward revision, the value can be adjusted back up, but not above the value at origination. Modifications that unequivocally increase the property’s value could also be considered. Separately, the value can be revised upward at least five years after the start of repayment or possession, whichever is later, on a fresh valuation for a new or additional loan.
• Monitoring (paragraph 16(1)(iii)): collateral value at least once in three years, with a qualified professional valuer when value may have fallen materially relative to general market prices or the account is NPA or Stage 3.

The qualifying conditions cover legal enforceability, claims over the property, repayment capacity, prudent valuation and documentation. Repayment capacity must be assessed irrespective of property value. Paragraph 16(1)(i) requires underwriting policies to define metrics and their levels. The 2026 Directions do not set those levels, and limits vary by institution.

Tables 9 and 10 stop at 90% LTV. If a file sits above that, take the treatment to your capital or compliance team.

How are NPAs and undrawn limits treated?

Paragraph 17 of the 2026 Directions weights the unsecured portion of an NPA or Stage 3 asset, net of specific provisions, by provision cover.

Qualifying residential real estate, where repayment does not depend materially on the property’s cash flows, takes 100% net of specific provisions and partial write-offs. Only CRM-eligible collateral counts toward the secured portion. Land, buildings, plant, machinery and current assets do not.

For undrawn limits, paragraph 22 of the 2026 Directions sets out these CCFs.

Undrawn cash credit or overdraft limits for borrowers with aggregate fund-based working capital limits of ₹150 crore and above from the banking system take 20%, whether or not they are cancellable.

Worked example, made-up numbers

Assume a commercial bank, standard assets unless stated, no specific provisions, no other mitigation and all qualifying conditions met.

CGTMSE example: a ₹40 lakh micro-enterprise loan with 75% cover, treating the full amount as the amount in default for illustration. The ₹30 lakh guaranteed portion takes 0%. The ₹10 lakh balance takes 75%, so RWA is ₹7.5 lakh. Without cover, RWA would be ₹30 lakh.

NPA example: an unsecured ₹50 lakh MSME account.

Undrawn example: ₹100 lakh undrawn on an unrated MSME line, original maturity up to one year, not cancellable, 85% risk weight. In the first phase, the 30% CCF gives ₹30 lakh credit equivalent and ₹25.5 lakh RWA. In the second phase, the 40% CCF gives ₹40 lakh and ₹34 lakh.

These examples stop at RWAs because the risk weight tables do not set the capital ratio a bank applies.

Pitfalls

• Treating turnover as the whole retail test. All four criteria must be met, and an affiliated MSME is tested at group level.
• Assuming a rating always helps. Where a facility has a rating from a chosen ECRA, the risk weight follows it (paragraph 24(1)). BB maps to 100%, which is above the 85% for other unrated MSME exposures.
• Relying on a rating that does not qualify. A rating must be in force, public and reviewed within the previous 15 months. A loan rating whose press release does not name the bank and facility is treated as unrated (paragraph 25).
• Missing a poor rating elsewhere on the same issuer. A long-term issue that warrants 150% pulls all unrated exposures to that issuer to 150% (paragraph 32(5)).
• Ignoring Issuer Not Cooperating status. Other ratings apply with a 100% floor for the first six months, then 150% until the status is withdrawn (paragraph 31).
• Using current market value for LTV. Value at origination is the default, downward revisions must flow through, and upward changes are limited to the routes in paragraph 16(1)(iv)(b) and (c).
• Leaving undrawn amounts out of the numerator. Undrawn committed amounts count toward LTV and the ₹3 crore test.
• Counting only your own bank’s housing loans. The count is at banking system level and includes co-applicants.
• Applying 0% to the whole guaranteed loan. The benefit stops at the maximum permissible claim.
• Taking the LTV bucket after mitigation. The bucket and risk weight are set before CRM is applied (paragraph 16(3)).
• Overlooking unhedged foreign currency. Paragraph 20 adds a 25% risk weight increase for entities above its potential loss to EBID threshold, and a 1.5 times multiplier, capped at 150%, for certain unhedged exposures to individuals.

Checklist

• Confirm your institution is a commercial bank as defined in paragraph 3 of the 2026 Directions.
• Record product, turnover, group affiliation and aggregated exposure for the retail test.
• Record whether any eligible rating exists on the facility or issuer, its date, and any Issuer Not Cooperating status.
• Record aggregate banking system exposure for unrated MSME borrowers.
• For real estate, record whether the security is finished, its type, and whether property cash flows exceed 50% of loan servicing.
• Record LTV inputs: funded outstanding, undrawn commitment, origination value and any downward revision.
• Evidence an independent valuation. Paragraph 16(1)(ii) deems a bank’s empanelled independent valuer compliant.
• Record the housing loan count, including co-applicants, and how it was arrived at.
• Track construction start and completion dates against the permitted timelines.
• For guaranteed loans, record the scheme, the maximum permissible claim and any first-loss portion.
• Classify each undrawn limit by original maturity and cancellability.
• Refresh counterparty due diligence at least annually, and keep evidence of it.