RBI Proposes Major Overhaul Of Credit Risk Framework For Banks

The Reserve Bank of India (RBI) has unveiled draft rules to overhaul the way banks measure and manage credit risk. The RBI’s plan seeks to align India’s capital rules with global standards, while allowing banks greater room to judge borrower risk, according to a report by PTI.

Reworking Risk Weights

The RBI wants banks to assign risk weights that better capture the actual level of risk in each loan category, including corporate, micro and medium enterprises (MSMEs), or real estate. The RBI’s idea is to make capital allocation more accurate and less one-size-fits-all.

A small but noteworthy tweak concerns credit card users who always pay their bills on time. These disciplined borrowers, often called “transactors,” could soon be placed under the regulatory retail category. That classification would allow banks to hold less capital against such exposures. In simple terms, responsible credit use might finally get a little regulatory reward.

Officials have emphasised that this proposal isn’t about relaxing standards. Rather, it’s about refining how risk is measured. By recognising behaviour patterns and credit quality more precisely, banks could release capital to sectors that need it most, without taking on fresh systemic risk. Industry watchers see this as a welcome middle path between prudence and growth.

Moving Towards A New Loss Model

The RBI has also proposed a shift in how banks make provisions for bad loans. At present, lenders recognise losses only after a borrower actually defaults. The new system, known as the Expected Credit Loss or ECL model, would flip that process. Banks will no longer wait for an account to slip into trouble. They will need to estimate possible losses beforehand and set money aside upfront. The aim is to catch signs of stress early, limit surprises, and make the banking sector sturdier in the long run.

The transition won’t be abrupt either. The new system is proposed to kick in from April 1, 2027, with a five-year phase-in period. That long runway has been designed to give banks time to strengthen their data analytics, build credit-scoring systems, and fine-tune internal risk models.

The RBI has invited feedback from banks, auditors, and other stakeholders before finalising the guidelines.