Standardised approach for calculating credit risk-weighted assets

Blog
10 minute read
July 08, 2026

Setting the context

On 27 April 2026, the RBI introduced the Directions for Credit Risk Capital Charge under Basel III Standardised Approach.¹ The effective date for implementation is 1 April 2027.

With this, India takes a significant step towards aligning itself more closely with global banking capital and risk management regulations. The salient features of the RBI’s guidelines are as follows:

Final phase before Basel IV: Following the footsteps of regulators globally, these guidelines help India enter into the Basel III Endgame and gear up for the next version.
Reduced emphasis on internal models: The guidelines show greater reliance on a prescriptive approach, including external ratings. In contrast, global regulators like Prudential Regulation Authority (PRA), Monetary Authority of Singapore (MAS), and Hong Kong Monetary Authority (HKMA) continue to allow a choice between standardised and internal ratings-based (IRB) approaches.
Impact beyond capital computation: Beyond capital computation, implementation of the new Standardised Approach will have broader implications for product pricing, risk-adjusted returns (RAROC), and the ICAAP framework, as more granular and risk-sensitive capital treatment will need to be reflected in pricing, portfolio strategy, and internal capital assessment.

It may also increase the relevance of climate risk considerations as part of borrower due diligence and risk management. Compared with the earlier RBI framework,² which relied more on broad buckets and static ratingbased treatment, the new Standardised Approach is more granular, risk-sensitive, and governance-led.

Governance and enhanced due diligence

The new framework strengthens credit assessment, oversight, and broader risk evaluation. Key aspects of governance and enhanced due diligence are set out below.

The directions require banks to maintain a formal due diligence framework that gives them an adequate understanding of each counterparty’s risk profile at origination and on an ongoing basis, at least annually.

Key implication: Establish ongoing risk-based reviews, strengthen internal scorecards, early warning signals (EWS), and expected credit loss (ECL). This will require higher investment in data, monitoring, and credit operations to support periodic borrower assessment and early risk detection.

Internal credit assessment becomes a due diligence overlay under the Standardised Approach. It must align with ECRA-based risk weight but cannot reduce risk weight below the external rating based level.

Key implication: Internal due diligence cannot provide capital relief. Its role is to validate and identify deterioration early but not to justify a lower regulatory risk weight than that implied by the applicable ECRA rating.

Shifts from applying group/parent ratings across entities to assessing each borrower on its own, with due diligence required at the solo entity level where the actual credit exposure exists.

Key implication: Assess each borrowing entity at the solo level, including its standalone repayment capacity, while considering group support and the potential impact of stress elsewhere in the group. This may require changes to credit appraisal and monitoring for entities such as special purpose vehicles (SPVs) and holding companies

The directions allow banks to consider climate-related financial risks as part of counterparty due diligence.

Key implication: Assess climate risks—both physical and transition—using quantitative and qualitative factors, and link outcomes to credit decisions, monitoring, and capital/risk-weight engines.

Granular capital requirements

The framework introduces more granular capital treatment based on ratings, ODR, and risk structure.

Key aspects of granular capital requirements are set out below.

Key implications: The framework leads to greater sensitivity to credit quality and default performance, particularly for rated exposures where both external ratings and ODR experience now affect capital treatment.

Capital outcomes also become more dynamic because they depend not only on borrower category, but also on factors such as hedging status, maturity profile, currency alignment, and the structure of credit protection. At the same time, large unrated exposures face a higher capital burden, especially where aggregate banking system exposure crosses the prescribed threshold. Overall, this strengthens the need for better borrower rating coverage, data quality, and exposure monitoring across portfolios.

Corporate exposure

Corporate risk weights are now more dynamic and better aligned with credit quality.

Key aspects of corporate exposure are set out below.

More dynamic risk sensitivity
Relief for highly rated exposures
Capital relief for mid- and lowrated corporates
Favourable treatment for short-term and certain unrated exposures

More dynamic risk sensitivity

An ODR-based overlay has been introduced for rated corporate exposures, so risk weights are no longer based only on static rating-to-risk-weight mapping. Instead, the base risk weight must now be adjusted based on the latest available average one-year ODR for the relevant rating category, as published by the applicable domestic ECRA.

Relief for highly rated exposures

The revised framework provides more favourable capital treatment for highly rated corporate exposures by assigning lower base risk weights to the top rating categories. It reduces the risk weight for the AA rating bucket from 30% to 20%.

Capital relief for mid- and lowrated corporates

The revised framework also provides more favourable capital treatment for mid- and low-rated corporate exposures by lowering the applicable risk weights for certain rating buckets. Under the revised mapping, the BBB rating bucket attracts a 75% risk weight (reduced from 100% earlier), while the BB rating bucket attracts a 100% risk weight (reduced from 150% earlier).

Favourable treatment for short-term and certain unrated exposures

The framework provides more favourable treatment for short-term highly rated corporate exposures and for smaller unrated exposures. The A1 short-term rating bucket now attracts a 20% risk weight, compared with 30% under the earlier framework. For unrated corporates and NBFCs, the higher 150% risk weight now applies only where aggregate exposure from the banking system exceeds ₹500 crore, compared with ₹200 crore earlier. Below this threshold, the standard unrated treatment applies.

Key implications: Lower risk weights for highrated, mid-rated, and BB-rated corporate exposures reduce capital requirements and improve alignment with credit quality.

The framework also provides lower capital charges for short-term highly rated claims and relief for some unrated corporate exposures below the prescribed threshold.

At the same time, risk weights become more dynamic and linked to rating performance through the ODRbased adjustment mechanism.

Specialised lending

Capital outcomes for specialised lending now reflect project quality, structuring, and standalone viability.

Key aspects of specialised lending are set out below.

Newly introduced specialised lending framework

A distinct framework has been introduced for specialised lending under corporate exposures, covering project finance and object finance where issue-specific external ratings are not available. Under this framework, object finance attracts a 100% risk weight, while project finance attracts 130% in the pre-operational phase, 100% in the operational phase for non-high-quality projects, and 80% for high-quality operational projects.

Key implications: This creates a more differentiated capital treatment based on the nature and stage of specialised lending exposures. Capital requirements are higher during the construction/pre-operational phase, reflecting elevated execution and completion risk. These become lower once projects become operational and demonstrate stronger cash flow visibility.

The framework also creates an incentive for projects to achieve operational stability and qualify as high-quality projects, which can attract a lower risk weight of 80% subject to specified conditions.

Shift to asset-based (SPV) lending framework

The specialised lending framework reflects an assetbased approach in which repayment is linked primarily to the cash flows generated by the underlying project or financed asset, rather than to the broader balance sheet of the sponsor. The regulation defines object finance as funding for acquisition of equipment where repayment depends on cash flows from the specific financed asset that is pledged or assigned to the lender, and project finance as a form of specialised lending under corporate exposures.

The framework also places emphasis on projectlevel performance, operating cash flows, contractual protections, reserve arrangements, and lender safeguards in determining the applicable risk weight, especially for operational and high-quality projects.

Key implications: Reduced dependence on sponsor strength; focus shifts to the standalone viability of the SPV or project. Banks will need to assess project cash flow strength, repayment capacity, asset-level security, contractual protections, reserve funding, and legal enforceability of lender rights, rather than relying primarily on the financial strength of the broader sponsor group.

Rated exposures and riskweighted flexibility

Where an issue-specific external rating is available for a specialised lending exposure, the exposure is risk weighted under the corporate rating-based framework, instead of the fixed specialised lending risk weights.

Only specialised lending exposures without an issuespecific external rating are risk weighted under the specialised lending framework.

Key implications: This can allow lower capital treatment for well-rated specialised lending exposures where the issue-specific rating maps to a more favourable corporate risk weight than the applicable specialised lending risk weight. It also encourages eligible project and asset-backed structures to obtain issue-specific external ratings, while ensuring that the risk treatment remains linked to the specific instrument being financed rather than to a broader issuer-level rating.

High-quality classification and structuring discipline

An 80% risk weight is available for operational phase project finance exposures classified as high-quality projects, but only if specified conditions are met. These include positive net cash flow, commencement of interest and principal repayment, at least one year of stable operations, adequate lender protections and reserves, and predictable revenue arrangements.

Key implications: The framework links the lowest risk weight in specialised lending to disciplined structuring and demonstrated project performance. To qualify for the 80% risk weight, banks and borrowers will need stronger project structuring, clearer creditor protections, tighter covenant packages, dependable revenue arrangements, and evidence of stable post-completion operations. This creates a capital incentive for projects to move from construction and early operational uncertainty towards sustained and well-protected cash flow performance.

Real estate exposure

Real estate capital treatment is now more granular, with sharper differentiation by loan-to-value (LTV), repayment source, and project type.

Key aspects of real estate exposure are set out below.

Risk weights for housing loans to individuals are now linked to both the LTV ratio and the number of housing loans held by the borrower at the banking system level.

For up to two housing loans, the applicable risk weights range from 20% to 40% depending on the LTV bucket. For the third housing loan onwards (excluding fully repaid loans), the risk weights range from 30% to 60% across the same LTV bands. In both cases, an additional 5 percentage points of risk weight applies where the total loan outstanding is ₹3 crore or above. These risk weights apply subject to compliance with the qualifying conditions for real estate exposures.

Commercial real estate exposures are now more specifically classified, with commercial real estate – acquisition, development, and construction (CRE-ADC) treated as a separate category within the real estate exposure class. Under this treatment, residential real estate projects falling under CRE-ADC attract a 100% risk weight, while other CRE-ADC exposures, including commercial or non-residential real estate projects, attract a 150% risk weight. This results in more differentiated capital treatment based on the nature of the underlying real estate activity.

Real estate-backed loans are now classified based on the primary source of repayment. The directions distinguish between exposures where repayment is expected from the cash flow generated from the economic activity for which the loan is taken, and exposures where repayment is primarily envisaged from the rent, lease, or prospective sale of the underlying property. This distinction applies across claims secured by residential properties, commercial properties, and other real estate, with different risk weight depending on the source of repayment.

Favourable risk weight treatment for real estate exposures is now tied more clearly to compliance with specified qualifying conditions and prudential safeguards. These include legal enforceability of the bank’s claim on the mortgaged property, prudent and independent valuation of the property, underwriting policies that assess the borrower’s repayment ability, and compliance with the prescribed LTV limits. The regulation also requires periodic monitoring of collateral values and makes clear that exposures not meeting the qualifying conditions may attract less favourable risk weight treatment.

Key implications: Development and construction exposures face more conservative capital treatment, with CRE-ADC exposures attracting 100% risk weight for residential projects and 150% for other commercial or non-residential projects. Capital relief for other real estate exposures becomes more dependent on meeting the prescribed qualifying conditions, including enforceability of security, prudent valuation, underwriting discipline, and LTV compliance. Lower-LTV housing loans to individuals may benefit from lower risk weights, particularly for borrowers with up to two housing loans, while borrowers with a third housing loan onwards are subject to relatively higher risk weights across LTV buckets. An additional 5 percentage point add-on also applies for qualifying housing loans where total loan outstanding is ₹3 crore or above.

Regulatory retail asset classes (retail portfolio, MSMEs)

The framework broadens retail/MSME eligibility while introducing more granular risk weight treatment.

Key aspects of regulatory retail asset classes are set out below.

The eligibility criteria for inclusion in the regulatory retail portfolio have been broadened. Under the new framework, a small business with a turnover of ₹500 crore or less, including an MSME, can qualify. If the entity is affiliated to another business entity, this turnover test must be met at the group level. In addition, the maximum aggregated exposure to one counterparty has been increased to ₹10 crore. Claims meeting the qualifying criteria are included in the regulatory retail portfolio and attract a 75% risk weight.

Key implications: More MSME and small business borrowers can qualify for the 75% risk weight, provided they satisfy the turnover, exposure, product, and granularity conditions. This expands the scope for favourable retail treatment, but eligibility remains dependent on compliance with the group-level turnover test, the ₹10 crore exposure cap, and the portfolio granularity requirement.

MSME exposures are now subject to a more differentiated risk weight structure instead of being treated only through the broader corporate or retail buckets. Rated MSME exposures are risk weighted as per corporate exposures.

For unrated MSME exposures, those that meet the regulatory retail portfolio criteria are assigned a 75% risk weight, while other unrated MSME exposures that do not meet the retail criteria attract an 85% risk weight.

Further, unrated MSME exposures with aggregate exposure from the banking system of more than ₹500 crore attract a 150% risk weight, excluding specialised lending exposures under corporate exposures.

Key implications: Capital treatment for MSMEs becomes more risk-sensitive and depends on whether the exposure is rated or unrated, whether it qualifies for the regulatory retail portfolio, and whether aggregate banking system exposure crosses the ₹500 crore threshold. Banks will therefore need clear identification and tagging of MSME exposures by rating status, retail eligibility, and aggregate exposure level to ensure correct risk weight assignment.

The directions continue to keep personal loans outside the regulatory retail portfolio, except for education loans that meet the retail criteria. Such personal loans attract a 125% risk weight.

For credit card receivables, the framework now distinguishes between those that qualify as transactors and those that do not. Credit card receivables that qualify as transactors are eligible for inclusion in the regulatory retail portfolio, while other credit card receivables are excluded and attract a 125% risk weight.

The directions define transactors as obligors under facilities such as credit cards and charge cards whose balance has been repaid in full at each scheduled repayment date, including a grace period of three days, for the previous 12 months.

Key implications: Banks will need product-level tagging to distinguish between eligible regulatory retail exposures, personal loans, transactor credit card receivables, and other credit card receivables that remain outside the retail portfolio. This affects both eligibility for the 75% retail risk weight and application of the higher 125% risk weight for excluded products.

Credit risk mitigation strategies

Credit risk mitigation is now assessed more precisely through enforceability, haircuts, and exposure-level protection.

Key aspects of credit risk mitigation strategies are set out below.

Legal enforceability must for capital relief
Comprehensive collateral approach
Granular treatment of CRM components
Recognition of residual risks despite CRM

Legal enforceability must for capital relief

Recognition of credit risk mitigation (CRM) for regulatory capital purposes is subject to legal certainty. The directions require that all documentation used in collateralised transactions, on-balance sheet netting agreements, and guarantees must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must conduct sufficient legal review, keep that review well documented, and undertake further review as necessary to ensure continuing enforceability. The directions also require banks to maintain robust processes to manage residual risks arising from CRM, including legal and operational risks.

Comprehensive collateral approach

The directions require banks to use the Comprehensive Approach for collateralised transactions, under which eligible financial collateral is recognised using its volatility-adjusted value rather than by simple substitution of the counterparty risk weight. This makes collateral treatment more risk-sensitive and brings in the use of supervisory haircuts, including for currency mismatch. The framework also links haircut calibration to the frequency of revaluation/remargining.

Granular treatment of CRM components

The directions require a more granular, exposure-level treatment of CRM instead of broad portfolio-level recognition. Where a single exposure is covered by more than one CRM technique, such as collateral, guarantees, or netting, the exposure must be split into separate covered portions, and the risk-weighted assets (RWA) for each portion must be calculated separately. Similarly, where protection from one provider has different maturities, it must also be recognised in separate parts. This ensures that capital relief is aligned to the exact form and extent of protection available on each exposure.

Recognition of residual risks despite CRM

The directions make clear that while CRM can reduce or transfer credit risk, it can also create or increase other residual risks. These include legal, operational, liquidity, and market/concentration risks, which banks are expected to control through robust strategies, systems, valuation processes, policies, and concentration management. The regulation also states that if these risks are not adequately controlled, the Reserve Bank may impose additional capital charges or take other supervisory action.

Key implications: If legal enforceability is not established, CRM recognition for regulatory capital purposes may not be available, which can increase the applicable RWA. Capital relief under collateralised transactions becomes more risk-sensitive through the Comprehensive Approach, requiring systems to support supervisory haircuts, treatment of currency mismatches, and revaluation/remargining-linked calculations. Banks must also be able to identify and split the covered and uncovered portions of exposures where different CRM techniques apply and calculate risk weights separately for each protected portion. In addition, the directions place emphasis on stronger controls, monitoring, documentation, and disclosure, and make clear that inadequate management of residual risks may lead to additional capital charges or other supervisory action.

Capital allocation and portfolio re-balancing through RAROC

More differentiated risk weights strengthen capital-aware pricing, segmentation, and portfolio optimisation.

Key aspects of capital allocation and portfolio re-balancing through RAROC are set out below.

Key action points

Recalibrating pricing to reflect risk-adjusted returns
Lending spreads, hurdle rates, and product pricing should be recalibrated to reflect the more differentiated capital treatment across segments and structures.
Improving RAROC through segmentation, rating, and eligibility monitoring
Banks will need stronger monitoring of borrower ratings, retail eligibility, LTV bands, project phase, operational quality, and exposure thresholds to optimise capital usage.
Incentivising migration toward rated/high-quality assets

Business strategy may increasingly encourage movement towards exposures that qualify for lower risk weights, including rated borrowers, operationally stable projects, and exposures meeting qualifying conditions for more favourable treatment.

A global perspective

How nations are embracing the revised Standardised Approach for credit risk

Early movers
Japan, Singapore, Australia

Near completion
EU, Hong Kong, Switzerland

Late adopters
USA, India, UK³

Japan implements

The four major Japanese banking groups—Mitsubishi UFJ Financial Group (MUFG), Sumitomo began phasing in the finalized Basel standards from Mar’24 to Mar’29⁴
Credit risk exposure rose 4% to 28% at the four banks from end December 2023 to end Mar 2024.
Even if a bank uses IRB models, the revised Standardised Approach becomes the benchmark because of the output floor (72.5%).

USA deliberates

In March 2026, the Federal Reserve System (FED) released a Notice for Proposed Rulemaking (NPR) for Basel III Standardised Approach implementation and Global Systemically Important Bank (GSIB) surcharge.⁵
The proposal affects the nine largest US banks differently based on their business model, with capital impacts varying by up to 17%.

Authors

Kuntal Sur, Tarun Saraf, Vikas Patil

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