In late 2025, as part of a draft paper put out for public comments, the Reserve Bank of India (RBI) proposed certain modified norms for scheduled commercial banks, with regard to computation of capital charge for credit risk. If implemented as proposed, these guidelines can hugely impact the Indian banking sector as well as the loan-seeking corporate sector – in a manner that is unprecedented, mitigating a dispensation that has been in place for well over 15 years.
Currently, RBI requires Indian banks to keep a minimum level of capital according to borrowers’ credit ratings by agencies like CRISIL, ICRA , CARE etc. Such a capital charge follows the globally recognized regulatory standards developed by the Bank of International Settlements (BIS) - generally referred to as Basel Norms. Since 1988, Basel-I norms and its successive versions, Basel-II and III, have been the bedrock of international banking regulations seeking to strengthen the international banking system. In India, RBI introduced regulatory norms aligned to Basel norms in the early 1990s and subsequently moved to directionally implement Basel-II (2004) and Basel-III (2010) – appropriately modified to suit India’s context.
Risk Weighted Assets
Maintaining minimum capital according to Risk Weighted Assets (RWA), in order to moderate the impact of credit risk is a central tenet of Basel norms, although the latter’s scope also includes other aspects. RBI’s recent proposal becomes significant in this context. Credit rating agencies denote credit risk in ordered risk categories such as AAA, AA, A, BBB, BB, B etc., wherein borrowers rated BB or lower, are generally considered to ingrain high risk. The current RBI norms for computing RWA apply graded weights ranging from 20-80 per cent from AAA to A, 100 per cent to BBB, and from 150 per cent upwards to credits rated BB category or lower.
For example, if a bank lends ₹100 to a company rated BB, applying current RWA norms, it is considered as effectively having lent ₹150; whereas if it lends the same amount to a AAA borrower, it is considered effectively as having lent only ₹20; and as ₹100 itself, if the entity is rated in the BBB category. Accordingly, the capital banks maintain have to be higher or lower.
Given this RWA approach, banks have to strategically choose how much and to whom they lend to. It has a direct implication on banks’ ability to grow their loan book. By implication, this also impacts the credit availability for companies- especially for those that fall in perceived higher risk categories, such as SMEs and MSMEs.
The big change
RBI’s proposal effectively shifts the rating-risk mapping by one step. That is, instead of 100 per cent risk weight being applied at the BBB category, it may now apply only at the BB category. The import of this single step-change however is staggering. One, this can release a huge amount of money for lending, as banks’ capital charge effectively eases.
An estimate by CRISIL pegs this extra amount of the order of about ₹70,000 crore. Also, a large chunk, about 25-30 per cent of all rated companies fall in the BB category, and they can all benefit from this change. The signaling effect is perhaps even more important; with this single move, RBI has prompted and also effectively enabled banks to now approach the SME segment with a lot more intent, and much less stigma.
Needless to say, it also needs to be accompanied by appropriately stronger credit appraisal and monitoring banks, to ensure prudent growth. The impetus for growth that this step affords to the SME/MSME sector, verily the engine of India’s growth aspirations under the Viksit Bharat Vision, can be tremendous. Finally, the proposed norms, if implemented, will bring RBI’s RWA norms to closer alignment with the Basel-III norms, the current norms being more conservative.
RBI’s consultative paper has more to it beyond the change in RWA, that is beyond the scope of this article. This includes a mapping of ratings to Probability of Default (PD), a much-needed measure to enhance the quality of credit ratings. Nevertheless, this step change in the RWA dispensation can be a game-changer for Indian banking and SMEs.
The writer is Associate Dean and Associate Professor, IIM Kozhikode
Published on April 21, 2026