India: Credit-risk capital overhaul reshapes ratings – Societe Generale

Societe Generale economist Kunal Kundu explains that the Reserve Bank of India’s revised Standardised Approach for credit-risk capital will tie regulatory risk weights to both borrower ratings and each agency’s historical default performance from April 2027. The reform aims to enhance risk sensitivity, align with Basel III, curb rating shopping and force banks to upgrade internal credit assessment and capital management practices.

RBI links capital to rating performance

"Under the new framework, a loan’s capital treatment will depend not only on the borrower’s rating grade but also on the historical default performance of the rating agency assigning that rating."

"The objective is to make risk weights more risk-sensitive, comparable and robust, while reducing mechanical reliance on external ratings and aligning India’s framework with the Basel III final reforms."

"This change sits within a broader overhaul of credit-risk capital rules covering corporates, MSMEs, real estate, retail exposures, off-balance-sheet items and external credit assessments."

"This is a meaningful shift from a system where a rating grade such as AA, A or BBB was broadly treated as equivalent across eligible agencies."

"RBI’s framework is a major reform in India’s credit-risk capital architecture."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)