The Reserve Bank of India (RBI) has issued two important draft Directions aimed at overhauling the credit risk and provisioning framework for Scheduled Commercial Banks and All India Financial Institutions (AIFIs). These drafts, released in line with the Statement on Developmental and Regulatory Policies dated October 1, 2025, are now open for public feedback until November 30, 2025.
These reforms represent a major shift in India’s banking regulation, aligning domestic practices with evolving international standards, particularly the Basel III reforms.
A. Draft Directions on Capital Charge for Credit Risk – Standardised Approach, 2025
This draft is rooted in the global Basel Committee on Banking Supervision (BCBS) reforms, but customized to the Indian context. The objective is to enhance the robustness, granularity, and risk sensitivity of the capital framework for banks, ensuring that they hold adequate capital based on the actual risk of their credit exposures.
Key Features:
- Granular Risk Weights: Refined and differentiated capital requirements for loans to corporates, MSMEs, and the real estate sector, making risk assessments more accurate.
- Recognition of ‘Transactors’: Credit card users who have consistently paid on time in the last 12 months will fall under the regulatory retail category, attracting lower capital charges.
- Updated Credit Conversion Factors (CCF): Enhancements in how banks assess off-balance sheet exposures, improving transparency in capital adequacy.
- Ratings-Based Adjustments: Loans rated by credit rating agencies will attract capital based on their default history and due diligence practices, encouraging better credit discipline.
Impact: These changes are expected to reduce regulatory capital requirements, especially benefiting banks with large exposures to MSMEs, real estate, and retail credit card portfolios.
B. Draft Directions on Asset Classification, Provisioning and Income Recognition, 2025
This draft shifts from an incurred-loss provisioning model to an Expected Credit Loss (ECL) framework—bringing Indian banks in line with IFRS 9 standards and international best practices.
Key Features:
- Staging of Assets: Introduction of Stage 1, 2, and 3 classification, enabling more dynamic credit loss estimation.
- Prudential Floors: Minimum provisioning levels specified for each asset stage to ensure prudence and comparability.
- Effective Interest Rate (EIR) Method: Aligns income recognition norms with internationally accepted accounting practices.
- Model Risk Management: Sets expectations for robust oversight and validation of ECL models, ensuring reliability in provisioning.
Impact: While the transition will involve a one-time increase in provisioning, the RBI notes that overall capital adequacy across banks is unlikely to be adversely affected. A five-year glide path will ease the migration process and ensure minimal disruption.
What Happens Next?
The RBI is inviting comments and suggestions from stakeholders and the public until November 30, 2025. Feedback can be submitted online via the ‘Connect2Regulate’ section on the RBI website or directly via email/post.
Conclusion
These draft directions mark a pivotal evolution in India’s banking regulatory framework. By enhancing risk sensitivity and aligning with global best practices, the RBI is taking decisive steps to ensure the Indian banking system remains resilient, transparent, and forward-looking.
Banks, rating agencies, credit professionals, and financial institutions must gear up for these changes and engage actively during the consultation period to help shape the final guidelines.