RBI finalises new risk weight norms
The Reserve Bank of India has finalised new risk weight norms for the regulatory retail portfolio, reducing the risk weight to 75% for qualifying loans — bro...
What Happened
- The Reserve Bank of India has finalised new risk weight norms for the regulatory retail portfolio, reducing the risk weight to 75% for qualifying loans — broadly aligned with the Basel III standardised approach.
- These norms form part of the RBI's broader implementation of Basel III capital charge directions for credit risk, which will also be effective from April 1, 2027.
- To qualify for the favourable 75% risk weight under the Regulatory Retail Portfolio (RRP), a loan must simultaneously satisfy four criteria:
- Borrower type: Individuals or small businesses (including non-MSMEs) with annual turnover up to ₹500 crore (standalone or group basis)
- Product type: Standard retail products (personal loans, auto loans, credit cards, small business loans — not project finance)
- Exposure cap: Total bank exposure to a single borrower/counterparty must not exceed ₹10 crore
- Portfolio granularity: No single borrower can account for more than 0.2% of the total regulatory retail portfolio
- The individual exposure limit has been raised from the earlier draft limit of ₹7.5 crore to ₹10 crore — a concession to banks that sought higher thresholds.
- The new norms represent a significant structural easing for banks extending credit to the retail and small business segment, freeing up regulatory capital that was previously over-provisioned.
Static Topic Bridges
What Are Risk Weights? The Basics of Capital Adequacy
Risk weights are the cornerstone of the Basel framework for calculating minimum capital requirements. They determine how much capital a bank must hold against each category of loan or asset.
The Mechanism: - Every bank asset (loan, investment, off-balance sheet exposure) is assigned a risk weight (0% to 150%+). - Risk weights reflect the credit risk of the asset: a risk weight of 100% means the asset is treated as "normally risky"; 75% means it is considered lower-risk. - Risk-Weighted Assets (RWAs) = Asset value × Risk weight - Minimum Capital Required = RWAs × Minimum CRAR (9% in India)
Example: - A ₹100 lakh retail loan with 75% risk weight → RWA = ₹75 lakh → Capital required = ₹6.75 lakh - The same loan with 100% risk weight → RWA = ₹100 lakh → Capital required = ₹9 lakh - Difference = ₹2.25 lakh capital freed up per ₹100 lakh of retail loans at the lower risk weight
Why This Matters: Banks with lower risk weights on qualifying portfolios can: 1. Lend more without raising additional capital. 2. Improve their CRAR (Capital to Risk-weighted Assets Ratio). 3. Price loans more competitively (lower capital cost passed on to borrowers).
Connection to this news: The 75% risk weight for qualifying retail loans reduces banks' RWAs and frees up regulatory capital — directly incentivising credit flow to individuals and small businesses.
Basel III Standardised Approach and the Retail Portfolio
The Basel III Standardised Approach (SA) for credit risk prescribes risk weights for different asset classes. For retail exposures:
Basel III Retail Portfolio 75% Risk Weight — Qualifying Criteria (BIS Standard): - Exposure to individuals or small businesses - Not concentrated (granular portfolio — no single borrower exceeds a threshold of the portfolio) - Maximum individual exposure cap (typically USD 1 million equivalent in the BIS standard; India has set ₹10 crore) - Standard retail products only (not wholesale/corporate loans)
- The 75% risk weight for qualifying retail under Basel's Standardised Approach was established in the original Basel II framework (2004) and retained in Basel III.
- India's RBI has customised the criteria to Indian market realities: the ₹500 crore turnover threshold for businesses is significantly more generous than the original Basel framework, expanding the qualifying universe to include larger small businesses.
- Loans that do NOT qualify for the 75% RRP are assigned higher risk weights (100% for standard corporate/commercial loans; 125%+ for consumer credit post Nov 2023 changes).
Connection to this news: The RBI's finalised norms broadly follow the Basel III SA template but with India-specific calibration — the ₹500 crore turnover cap and ₹10 crore exposure limit are Indian adaptations of the global framework.
The November 2023 Risk Weight Tightening — Context
To understand the significance of the 2026 finalisation, it is important to know the 2023 tightening cycle:
On November 16, 2023, the RBI sharply increased risk weights on consumer credit: - Consumer credit (personal loans) for banks: Risk weight raised from 100% to 125% (effective immediately) - Credit card receivables for banks: Raised from 125% to 150% - Bank lending to NBFCs: Risk weight raised from 100% to 125% (exceptions: housing, education, vehicle, gold loans) - Consumer credit for NBFCs: Raised from 100% to 125%
Reason for the 2023 tightening: The RBI was concerned about the rapid, unsecured growth of consumer lending and wanted to cool the segment by making it more capital-intensive.
Subsequent easing (2025): The RBI reversed some of these increases in February 2025 — restoring risk weights on NBFC loans from banks and microfinance loans, as credit concerns eased.
Connection to this news: The April 2026 finalisation of 75% risk weights for qualifying retail portfolios represents a further structural normalisation — but only for loans that meet the four strict eligibility criteria (turnover ≤ ₹500 crore, exposure ≤ ₹10 crore, etc.). The tightened 125% risk weights on non-qualifying consumer credit (personal loans, credit cards) remain.
How Risk Weights Affect Credit Growth
Risk weights are a key monetary policy transmission tool beyond the headline CRR/SLR instruments:
| Instrument | Effect on Credit |
|---|---|
| CRR (Cash Reserve Ratio) | Directly controls liquidity available for lending |
| SLR (Statutory Liquidity Ratio) | Forces banks to hold government securities, reducing lendable funds |
| Repo Rate | Determines cost of funds; affects lending rates |
| Risk Weights | Affects capital cost per loan; influences which loan segments banks prefer |
By lowering risk weights on retail/SME portfolios, the RBI makes it more capital-efficient for banks to lend to these segments — a supply-side push for credit to priority categories without changing interest rates.
- The RBI's risk weight calibration is a form of macroprudential policy — targeted regulation to shape the composition of credit rather than its overall volume.
- The Basel Committee on Banking Supervision (BCBS) at the Bank for International Settlements (BIS) sets the global risk weight standards; national regulators (like RBI) implement them with country-specific adaptations.
- India's CRAR for scheduled commercial banks was ~16–17% (March 2025), well above the 9% regulatory minimum — creating headroom to absorb the upcoming ECL provisioning costs.
Connection to this news: The RBI's final risk weight norms (with the ₹10 crore exposure cap and 0.2% granularity requirement) are designed to ensure the capital relief is concentrated in truly diversified retail portfolios — not large, concentrated bets dressed up as "retail" loans.
Four Qualifying Criteria for 75% Risk Weight — Rationale
Each of the four eligibility criteria serves a specific risk-management purpose:
| Criterion | Value | Risk Management Purpose |
|---|---|---|
| Borrower Turnover | ≤ ₹500 crore | Limits eligibility to genuinely small/retail borrowers; excludes large corporates |
| Product Type | Standard retail products | Excludes complex, structured, or project finance instruments with tail risks |
| Exposure Cap | ≤ ₹10 crore per borrower | Prevents large concentrated bets from enjoying the retail risk weight discount |
| Portfolio Granularity | No single borrower > 0.2% of portfolio | Ensures true portfolio diversification — loss from any one default is capped |
- The 0.2% granularity rule means a bank needs at least 500 eligible borrowers in its qualifying retail portfolio.
- The ₹10 crore cap was raised from the earlier draft proposal of ₹7.5 crore following industry feedback.
- The ₹500 crore turnover threshold is India-specific — it aligns with the MSME definition (which goes up to ₹250 crore turnover for large MSMEs) while also capturing some small non-MSME businesses.
Connection to this news: These criteria collectively ensure the 75% risk weight benefit accrues to genuinely granular, diversified retail portfolios — not to a handful of large exposures structured to look retail.
Key Facts & Data
- Qualifying risk weight: 75% for Regulatory Retail Portfolio (RRP)
- Borrower turnover threshold: Up to ₹500 crore (standalone or group)
- Individual exposure cap: ₹10 crore per borrower (raised from draft ₹7.5 crore)
- Portfolio granularity requirement: No single borrower > 0.2% of total RRP
- Effective date: April 1, 2027 (aligned with ECL and Basel III credit risk directions)
- Nov 2023 tightening (for context): Consumer credit risk weight raised to 125% (from 100%); credit cards to 150%
- Basel III retail risk weight: 75% under Standardised Approach (BIS standard)
- India minimum CRAR: 9% (Basel III BIS minimum: 8%)
- Current system CRAR (SCBs): ~16–17% (March 2025) — well above minimum
- Non-qualifying consumer credit risk weight: 125% (post Nov 2023; still in force for non-RRP loans)
- BCBS (BIS) role: Sets global Basel standards; RBI adapts for India
- Macroprudential tool: Risk weights operate alongside CRR, SLR, and repo rate to shape credit composition