RBI rejects easing of credit card rules, relaxes capital norms for borrowers

MUMBAI: The Reserve Bank of India (RBI) on Monday issued final rules on banks’ credit risk framework, tightening capital treatment for credit card borrowers while easing requirements for exposure to unrated companies and smaller businesses, as part of a broader overhaul aligned with Basel framework. The framework will take effect from 1 April 2027.

The final rules follow stakeholder feedback on a draft issued on 7 October 2025. They are based on the Basel framework, which allows banks to compute credit risk capital using either the Standardized Approach (SA) or Internal Ratings Based (IRB) approach. RBI has decided to proceed with the Standardized Approach for banks under its jurisdiction.

“The Reserve Bank of India has decided to implement the Standardized Approach (SA) for credit risk for banks under its jurisdiction, as prescribed in these Directions,” it said on Monday, adding that the objective is to ensure prudent and credible calculation of risk-weighted assets for arriving at capital ratios for banks in a “comparable and risk-sensitive manner”.

“While the new Basel-III rules will release capital, banks in India are currently sitting on excess capital, with CET1 around 14.7%—well above regulatory requirements of 8-9%. Hence, any impact near term will be limited from a growth standpoint unless demand picks up,” Macquarie Research said in a note following the release of the circular.

The note highlighted rules such as removal of risk weights based on the ticket size of mortgage exposures, general reduction in risk-weights across loan categories including to corporations and non-banking financial companies (NBFCs), and lowering of risk weights for micro, small and medium enterprises (MSMEs) exposures to 75-85% from 100% which is expected to help credit flow from banks. The rules are also seen positive for project finance exposures and credit card portfolios, it said.

Credit card rules

The central bank rejected banks’ demand to allow classification of an existing credit card holder with a clean 12-month repayment record at one bank as a ‘transactor’ immediately upon onboarding with another bank. ‘Transactors’ are borrowers who repay their credit card balances in full at each scheduled repayment date for the previous 12 months, and attract lower risk weights than regular credit card borrowers.

“The bank shall consider a credit card account as transactor only after a demonstration of full 12 months performance with itself,” the regulator said. It removed overdraft facilities from the scope of this classification but allowed a three-day grace period in credit reporting to be included in the repayment period used for classification.

Capital treatment

RBI has raised the threshold for unrated large exposures attracting a 150% risk weight from ₹200 crore to ₹500 crore, stating this would ensure higher risk weights apply only to relatively larger borrowers. It also withdrew the prudential treatment for accounts that were previously rated but have since become unrated.

For unrated foreign bank branches in India, the regulator allowed parent bank ratings to be used as a proxy, provided they are issued by international agencies such as S&P, Fitch, or Moody’s.

RBI also eased due diligence requirements. Banks will continue to follow internal policies, but the earlier requirement to increase risk weight by one notch if internal due diligence indicated higher risk than external ratings has been removed.

“Specialized lending exposures, i.e., project finance and object finance, shall be risk weighted as per their prescribed risk weights, irrespective of the size of the exposure,” RBI said on Monday, adding that conditions for classifying project finance exposures as ‘high-quality projects’ have been rationalized to reduce subjectivity and avoid exclusion of infrastructure projects where income flows from users rather than a single counterparty.

Small businesses

The central bank expanded the definition of eligible MSME-related exposure by modifying the ₹500 crore threshold to include all small businesses with turnover up to ₹500 crore, on a standalone or group-wide basis. It also raised the threshold for classification as regulatory retail exposure to ₹10 crore from ₹7.5 crore.

It eased its proposal to cap consolidated exposure to corporate groups, including MSMEs within the group, at ₹500 crore, broadening the eligibility to ensure benefits of lower risk weights extend to small businesses not formally registered as MSMEs.

Real estate rules

RBI rejected proposals to relax risk weights for residential and commercial real estate exposures tied to economic activity or underlying property cash flows. It maintained that risk weights will continue to be driven primarily by the quality of security and repayment structure, stating that “source of repayment is one of the critical criteria introduced under Basel III framework.”

However, it allowed upward revision in property value for the purpose of additional lending against the same asset, subject to safeguards. Such revisions will be permitted only after five years from the start of loan repayment or possession of the completed property, whichever is later, and subsequent revisions will also follow the same five-year condition.