Treatment of Counterparty Credit Risk – RBI Revises Directions for Banks

Subhojit Shome | Finserv@vinodkothari.com

The RBI on March 10, 2026 introduced the Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Third Amendment Directions, 2026 (“Amendment”). The Amendment mainly aims to:

• Clarify how banks should calculate Counterparty Credit Risk (CCR) for derivative and similar transactions.
• Align Indian capital adequacy rules with international standards (like Basel III Framework).
• Ensure banks maintain adequate capital for risks arising from derivative exposures.

The notable items included in the Amendment are as follows:

CCR must be calculated on a consolidated basis

A commercial bank needs to comply with the capital adequacy ratio requirements at two levels – the standalone (solo) level and the consolidated (group) level. For capital adequacy at consolidated level, all banking and other financial subsidiaries except the subsidiaries engaged in insurance and any non-financial activities (both regulated and unregulated) need to be fully consolidated. The Amendment provides that for computation of capital requirement on a consolidated basis, a bank shall consider the CCR exposures of all such entities.

Add-on Factors for Derivative Contracts

The amendment substantially replaces the table (Table 16) containing the add-on factors used to calculate potential future exposure for derivative contracts.

Banks must apply “add-on factors” based on the nature of the contract and the remaining maturity. The revised table is as follows:

Clarification on Resetting Contracts

The Amendment notes that if a derivative contract settles exposure periodically and gets reset to zero value after such settlement then banks should treat the remaining maturity as the time until the next reset date, not the full life of the contract. This remaining maturity (“residual maturity”) should be used to pick the Add-on Factor. For interest rate contracts, however, which have residual maturities of more than one year and meet the aforementioned reset criteria, the add-on factor shall be subject to a floor of 0.50 per cent. The Amendment provides for a lower floor for interest rate contracts compared to that specified previously (1.0 per cent).

Capital Requirement for Clearing Members

The Amendment notes that if a bank is a clearing member of an exchange or clearing corporation it must calculate and maintain CCR capital charge, as per the extant norms, for equity and commodity derivatives cleared for clients.

Clarification of Commodity Categories

The Amendment clarifies what is included under the terms Precious Metals and Other Commodities in Table 16.

Risk Weight for Exposure to Clearing Houses

If a bank trades through a Qualifying Central Counterparty (QCCP), the exposure should get a 2% risk weight. This applies when the bank:

• Trades for itself, or
• Clears trades for clients and is liable for client losses if the QCCP defaults.

However, no capital is required if:

• The bank has no legal obligation to compensate the client, and
• The bank has a written legal opinion confirming this position.