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Economics April 27, 2026 5 min read Daily brief · #14 of 37

Reserve Bank of India (Commercial Banks – Credit Risk Management) - Second Amendment Directions, 2026

The RBI issued the Commercial Banks – Credit Risk Management (Second Amendment) Directions, 2026, vide circular DOR.STR.REC.10/07-02-001/2026-27, dated April...

GS Paper 3 (Indian Economy Mobilisation of Resources)

What Happened

  • The RBI issued the Commercial Banks – Credit Risk Management (Second Amendment) Directions, 2026, vide circular DOR.STR.REC.10/07-02-001/2026-27, dated April 27, 2026, effective April 1, 2027.
  • The amendment modifies the existing Credit Risk Management Directions, 2025, issued under Section 35A of the Banking Regulation Act, 1949.
  • Banks may now use the Export Credit Guarantee Corporation of India Ltd. (ECGC) seven-category country risk classification system (A1 to D) for determining country risk exposure; quarterly updates on category changes are mandated.
  • For Unhedged Foreign Currency Exposure (UFCE), a new risk-weight trigger is introduced: when an entity's Potential Loss exceeds 75% of its EBID (Earnings Before Interest and Depreciation), banks must apply an incremental 25 percentage-point increase in risk weight.
  • Working Capital Loan (WCL) repayment rules are liberalised — banks may now structure repayments as either installments or lump-sum, with rollover options subject to existing asset classification norms.

Static Topic Bridges

Section 35A of the Banking Regulation Act, 1949

Section 35A empowers the Reserve Bank of India to issue directions to banking companies in the public interest, in the interest of depositors, or to prevent the affairs of a banking company from being conducted in a manner detrimental to depositors or the banking policy. It is the primary legal basis under which the RBI issues prudential norms, credit risk guidelines, and operational directives to commercial banks.

  • Section 35A vests the RBI with preventive and curative powers over commercial banks.
  • Directions issued under this section are binding on all scheduled commercial banks.
  • The section was strengthened by the Banking Regulation (Amendment) Act, 2020 to also extend certain supervisory powers to cooperative banks.

Connection to this news: The Second Amendment Directions, 2026, are issued under Section 35A, reaffirming RBI's authority to modify prudential norms for credit risk management at commercial banks.

Unhedged Foreign Currency Exposure (UFCE)

UFCE refers to the portion of a borrower's foreign currency liabilities (such as ECBs, foreign currency loans) not covered by a corresponding hedge — either a financial hedge (forward contracts, options) or a natural hedge (matching foreign currency revenues). Borrowers with high UFCE face currency risk: if the rupee depreciates, their repayment burden in rupee terms rises sharply, which in turn creates credit risk for the lending bank.

  • RBI first issued comprehensive UFCE Directions in 2022, effective January 1, 2023.
  • Banks are required to compute incremental capital requirements for UFCE on a quarterly basis.
  • The metric used is Potential Loss / EBID (Earnings Before Interest and Depreciation):
  • Potential Loss up to 75% of EBID: no incremental capital requirement
  • Potential Loss exceeding 75% of EBID: 25 percentage-point increase in applicable risk weight
  • For entities with insufficient data, the "last bucket" (highest risk weight) must be applied conservatively.
  • The framework incentivises borrowers to hedge their foreign currency exposures to avoid higher credit costs.

Connection to this news: The 2026 amendment refines and consolidates the UFCE risk-weight framework within the broader Credit Risk Management Directions, clarifying the 75% threshold and eliminating paragraphs 58(7) and 58(8) of the earlier directions.

Country Risk Classification and ECGC

Country risk refers to the risk that cross-border financial transactions may be disrupted due to political instability, sovereign default, or foreign exchange constraints in the borrower's country. Banks lending to entities in foreign jurisdictions or with cross-border exposures must factor in this risk. The ECGC (Export Credit Guarantee Corporation of India Ltd., a Government of India enterprise) classifies countries on a seven-tier scale from A1 (lowest risk) to D (no cover/highest risk), assessing political, economic, and payment-record factors.

  • ECGC is a public sector enterprise under the Ministry of Commerce and Industry.
  • Seven risk categories: A1 (Insignificant Risk), A2 (Low Risk), B1 (Moderate Low), B2 (Moderate), C1, C2 (High), D (Highest/No Cover).
  • ECGC provides credit insurance to Indian exporters against payment default and also against country-level political risks.
  • Banks use ECGC ratings as a reference to set country-risk provisioning for cross-border lending exposures.

Connection to this news: The amendment formally links RBI's country risk classification framework for commercial banks to ECGC's seven-category rating, with quarterly updates — improving consistency between RBI's prudential norms and India's export credit risk architecture.

Working Capital Loans (WCL) and Asset Classification

Working Capital Loans fund a company's day-to-day operational expenses (raw materials, wages, receivables). Traditionally, WCLs are structured as revolving credit facilities with annual renewals. RBI's asset classification norms require banks to classify loans as Non-Performing Assets (NPAs) if interest/principal remains unpaid for 90 days, with strict sub-categorisation (sub-standard, doubtful, loss).

  • The liberalisation of repayment structures (installment vs. lump-sum) provides operational flexibility to borrowers with irregular cash flows.
  • Rollover options are now explicitly permitted, subject to compliance with RBI's stressed asset resolution framework.
  • This is particularly relevant for MSMEs, exporters, and project-finance borrowers.

Connection to this news: The 2026 amendment grants banks discretion to customise WCL repayment structures, potentially easing credit access for businesses while maintaining NPA discipline through existing asset classification norms.

Key Facts & Data

  • Circular reference: DOR.STR.REC.10/07-02-001/2026-27, dated April 27, 2026
  • Effective date: April 1, 2027
  • Legal basis: Section 35A of the Banking Regulation Act, 1949
  • UFCE threshold: Potential Loss > 75% of EBID triggers 25 percentage-point incremental risk weight
  • ECGC categories: A1 (lowest) to D (highest/no cover) — seven tiers
  • ECGC update frequency under new norms: Quarterly
  • Deleted provisions: Paragraphs 58(7) and 58(8) of Credit Risk Management Directions, 2025
  • ECGC full form: Export Credit Guarantee Corporation of India Ltd.
  • EBID full form: Earnings Before Interest and Depreciation
On this page
  1. What Happened
  2. Static Topic Bridges
  3. Section 35A of the Banking Regulation Act, 1949
  4. Unhedged Foreign Currency Exposure (UFCE)
  5. Country Risk Classification and ECGC
  6. Working Capital Loans (WCL) and Asset Classification
  7. Key Facts & Data
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