Reserve Bank of India (Commercial Banks – Forthcoming Instructions) Directions, 2025

1. Start date not set

The effective date of these directions will be communicated separately by RBI.

2. Who is covered

The rules will bind commercial banks; small finance, payments, local area and regional rural banks are excluded.

3. Four rulebooks in one

These directions bring four pending rule sets into one book.

1. One sided margin ignored

A margin deal where the bank only posts and never collects counts as unmargined.

2. Cost of replacing trades

Without margin, the replacing cost is market value less trimmed collateral, never below zero.

3. Future risk never zero

The future exposure multiplier falls with excess collateral but never below 5 per cent.

4. Where the formula applies

The new approach covers over the counter, exchange traded and long settlement derivatives.

5. Not for security lending

It does not cover lending against securities; those follow the capital rules.

6. Netting needs a contract

Trades can be set off only under a binding two way contract; without one, every trade stands alone.

7. One formula for exposure

Derivative exposure at default is 1.4 times replacement cost plus potential future exposure.

8. Margined capped by unmargined

A margined netting set's exposure is capped at its unmargined calculation.

9. Margined cost formula

For margined trades the cost also counts the threshold and minimum transfer amount before a margin call.

10. Three asset classes

Each trade goes to interest rate, foreign exchange or credit by its main risk driver.

11. Sets that can offset

Offsetting works per currency for interest rates, per currency pair for exchange, and in one credit set.

12. Volatility trades cost five

For volatility trade sets the supervisory factor multiplies by five; basis trade sets take half.

13. Disputes double the horizon

Repeated long margin disputes double the margin period of risk for that netting set.

14. Sold options cost nothing

A sold option outside netting and margin agreements carries zero exposure.

1. Three months of grace

Trades with a house that loses qualifying status keep the old treatment at most three months.

BankPulse example. A clearing house loses its qualifying status on 1 March. Trades already with it keep the old treatment for a period not exceeding three months. From 1 June the old treatment ends.

2. Clearing house at two

A clearing member's trade exposure to a qualifying clearing house weighs just two per cent.

3. Client route at four

A client unprotected against the joint default of member and another client weighs four per cent.

4. Non qualifying costs 1250

Default fund money at a non qualifying clearing house weighs 1250 per cent, unfunded promises included.

5. A clearing house is financial

For capital purposes a clearing house counts as a financial institution.

6. Watch clearing exposures

All clearing house exposures, default fund included, reach senior management at least quarterly.

7. Safe custody costs nothing

Collateral parked safely with a keeper, out of reach of failure, needs no extra capital.

8. Default funds by formula

Contributions to a qualifying clearing house's default fund take a risk sensitive formula the house itself computes.

9. Formulas refreshed quarterly

The clearing house capital figures are recalculated at least quarterly, and on material change.

10. Capital times twelve and half

Computed capital converts to risk weighted assets by multiplying by 12.5.

11. Walkaway kills netting

A contract letting the survivor underpay a defaulter's estate gets no netting benefit.

1. Three size buckets

Coefficients rise with size through three buckets: 12, then 15, then 18 per cent.

2. Ten years of loss data

The loss average uses 10 years of high quality yearly loss data.

3. Five years at minimum

A bank with only five or more years of loss data uses what it has.

4. One lakh is the floor

Every operational loss event of ₹1,00,000 or more, net of recoveries, enters the loss data.

5. Missed losses come back

A missed loss event, once found, enters the data and stays ten years from detection.

6. Merged losses come along

A merged or bought business brings its past ten years of losses into the calculation at once.

7. Three years before dropping

A loss may leave the data only after at least three years inside it.

8. Old measure retired

The basic indicator approach for operational risk retires when these directions take effect.

9. No parallel run

Banks need not run the old and new operational risk sums side by side.

10. What operational risk is

Operational risk is loss from failed processes, people, systems or outside events, legal risk included.

11. Three building blocks

The new charge builds from a business indicator, its coefficient component, and an internal loss multiplier.

12. The indicator's three parts

The indicator adds three parts: interest and dividend, services, and the trading result.

13. Higher of two windows

Banks compute the indicator on both financial year and rolling quarter bases and use the higher.

14. Losses scale the charge

The internal loss multiplier builds on 15 times the bank's average yearly operational losses.

15. Small banks skip the multiplier

A bucket one bank simply holds its indicator component: no loss multiplier applies.

16. Fraud in loans stays out

A loss already counted in loan capital stays out of this loss data.

17. Trading errors stay in

Operational losses in trading, like wrong key strokes or algorithm crashes, count in the loss data.

18. Received, not promised

A recovery counts only after the money arrives; receivables do not count.

19. Provisions count at once

A provision made for an operational loss counts as loss immediately, topped up later if the settlement is bigger.

20. One event, one entry

Losses sharing one underlying cause group into a single loss event.

21. Dropping losses needs RBI

Excluding a loss needs RBI approval and a size above 5% of the average losses.

1. Reporting starts before the start

Even before the start date, banks report the shock results to RBI yearly in the fixed format.

2. Never one measure

A bank may never rely on a single measure of interest rate risk.

3. The outlier line

A bank losing over 15 per cent of Tier 1 capital in any scenario is an outlier facing supervisory action.

4. Small currencies grouped

Currencies under five per cent of global assets or liabilities share the largest residual currency's shock.

5. A written risk appetite

A board approved risk appetite statement must limit the risk in both economic value and earnings terms.

6. Reverse tests too

Banks must also run reverse stress tests to find the scenarios that would truly hurt.

7. Gap analysis retires later

Today's gap analysis methods phase out only after these directions take effect.

8. The board owns rate risk

The board owns banking book interest rate risk.

9. Delegation allowed

The board may delegate the monitoring to the asset liability committee.

10. New products tested first

Products new to the bank face a careful review and test phase before full rollout.

11. Stress tests steer capital

Interest rate stress testing feeds the bank's internal capital assessment and board decisions.

12. Models validated independently

Risk models are validated independently before use and reviewed on an ongoing cycle.

13. Vendor models included

Bought models and vendor inputs face the same validation and documentation duties.

14. Persistent gaps, RBI's method

If deficiencies persist, RBI can force the bank onto the prescribed standard calculation.

15. Half yearly board reports

The board hears interest rate risk summaries, limit compliance and stress results at least twice a year.

16. Own equity stays out

Economic value calculations exclude the bank's own equity.

17. Two balance sheet views

Economic value assumes a run off balance sheet; earnings assume a constant one.

18. Six prescribed shocks

Six prescribed rate shock scenarios test economic value; two of them test earnings.

19. The rupee shock sizes

For the rupee the shocks are 250 points parallel, 300 short and 200 long.

20. Nineteen time buckets

Cash flows slot into 19 predefined time buckets by repricing date.

21. Floating rates reset once

A floating rate position reprices fully at its first reset date, principal and all.

22. Sticky deposits capped

Sticky deposit shares and their assumed life are capped for each deposit type.

23. Small firms count as retail

Deposits of small businesses up to 7.5 crores, managed as retail, count as retail deposits.

24. Prepayment swings by scenario

Loan prepayment speeds scale by 0.8 or 1.2 depending on the direction of the rate shock.

25. Penalty free exits count

A term deposit without a compensating exit penalty is treated as carrying early withdrawal risk.

1. Old guidance repealed

The earlier instructions on these four subjects stand repealed from the day these directions arrived.

2. Old actions stay governed

Action already taken under the old rules stays governed by them.