RBI draft CVA framework: banks to compute Credit Valuation Adjustment capital charge under Basel III basic approach from 1 April 2027, with a simpler option for smaller derivative books
RBI released draft Directions on 7 August 2026 to replace its 2011 Credit Valuation Adjustment (CVA) framework with the basic approach (BA-CVA) of the final Basel III framework. Banks could choose the full or reduced version; a bank with non-centrally cleared derivatives of up to ₹10 lakh crore notional could instead set its CVA charge at 100% of its counterparty credit risk charge. Proposed date of effect is 1 April 2027; comments closed on 28 August 2026.
Key facts
- In force
- Draft only; proposed date of effect 1 April 2027; comments closed on 28 August 2026
- Who it affects
- Commercial banks with derivative portfolios (not SFBs, Payments Banks or Local Area Banks); bank treasury, market risk and capital teams
- What it is
- Comments invited
- Section
- FEMA & RBI
- Published
- 7 August 2026
In 30 seconds
- The draft is the Reserve Bank of India (Commercial Banks – Credit Valuation Adjustment Framework) Directions, 2026.
- It applies to commercial banks, not to Small Finance Banks, Payments Banks or Local Area Banks.
- Banks are to use the basic approach (BA-CVA), choosing either the full version (recognises hedges) or the reduced version (does not).
- Alternative: a bank whose aggregate notional of non-centrally cleared derivatives is ₹10 lakh crore or less may set its CVA capital requirement at 100% of its counterparty credit risk capital requirement.
- Supervisory risk weights range from 0.5% to 12% by sector and credit quality of the counterparty.
- Securities financing transactions are excluded from the CVA capital charge.
- It is a draft; proposed date of effect 1 April 2027, when paragraph 85(3) of the 2025 capital adequacy Directions would stand repealed.
हिंदी में सार
RBI ने 7 अगस्त 2026 को Credit Valuation Adjustment (CVA) framework के draft Directions जारी किए, जो 2011 के मौजूदा ढाँचे की जगह Basel III का basic approach (BA-CVA) लाने का प्रस्ताव करते हैं। बैंक full या reduced version चुन सकेंगे; जिन बैंकों के non-centrally cleared derivatives का कुल notional ₹10 लाख करोड़ तक है, वे CVA charge को counterparty credit risk charge के 100% के बराबर रख सकते हैं। यह अभी प्रस्ताव है, 1 अप्रैल 2027 से लागू करने की बात है; सुझाव की तारीख़ 28 अगस्त 2026 निकल चुकी है।
Before and now
Issued by RBI in 2011, based on the Basel Committee standards of 2010.
Proposed (draft): the basic approach (BA-CVA) of the final Basel III framework, full or reduced version, from 1 April 2027.
What CVA is
Credit Valuation Adjustment (CVA) is the adjustment made to the default risk-free price of a derivative to account for the possibility that the counterparty defaults. CVA risk is the risk of losses when CVA values change because counterparty credit spreads or market risk factors move. The CVA capital charge is the capital a bank holds against that risk.
What RBI has proposed
RBI’s existing CVA framework was issued in 2011, on the Basel Committee standards of 2010. The Basel Committee has since revised its CVA guidelines under the final Basel III framework. On 7 August 2026 RBI released the draft Reserve Bank of India (Commercial Banks – Credit Valuation Adjustment Framework) Directions, 2026, proposed to take effect from 1 April 2027. It is a proposal, not a final rule.
The draft covers commercial banks — banking companies other than Small Finance Banks, Payments Banks and Local Area Banks, corresponding new banks and the State Bank of India. The charge is computed on a standalone basis for all covered transactions in the banking book and trading book. Covered transactions are all derivatives except those transacted directly with a qualified central counterparty and certain others; securities financing transactions are excluded.
Three ways to compute the charge
| Route | Who it is meant for | Hedges recognised? |
|---|---|---|
| Reduced BA-CVA | A less sophisticated bank that does not hedge CVA risk | No |
| Full BA-CVA | A bank that hedges CVA risk; it must still calculate the reduced version, which is part of the full calculation | Yes — counterparty credit spread hedges |
| Alternate treatment | A bank whose aggregate notional of non-centrally cleared derivatives is ₹10 lakh crore or less | No |
Under the alternate treatment, the CVA capital requirement equals 100% of the bank’s capital requirement for counterparty credit risk, applied to the entire portfolio of covered transactions. The supervisor may refuse this option if CVA risk materially contributes to the bank’s overall risk. Risk-weighted assets for CVA risk are the capital charge multiplied by 12.5.
Proposed supervisory risk weights
| Sector of counterparty | Investment grade | High yield and not rated |
|---|---|---|
| Sovereigns, including central banks and multilateral development banks | 0.5% | 2.0% |
| Local government, government-backed non-financials, education and public administration | 1.0% | 4.0% |
| Financials, including government-backed financials | 5.0% | 12.0% |
| Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying | 3.0% | 7.0% |
| Consumer goods and services, transportation and storage, administrative and support services | 3.0% | 8.5% |
| Technology, telecommunications | 2.0% | 5.5% |
| Health care, utilities, professional and technical activities | 1.5% | 5.0% |
| Other sectors | 5.0% | 12.0% |
A rating of BBB- / Baa3 (long term) or A-3 / P-3 / F-3 (short term) and above counts as investment grade. Where a counterparty has more than one rating, the worst is used; where there is none, the not-rated weight applies.
Hedges
Only single-name credit default swaps, single-name contingent CDS and index CDS can be eligible CVA hedges; the draft notes that banks are currently not permitted to engage in single-name contingent CDS. A single-name CDS must reference the counterparty directly, a legally related entity, or an entity in the same sector and region — with supervisory correlations of 100%, 80% and 50% respectively. Eligible external hedges are excluded from the market risk capital requirement.
Disclosure
Banks would disclose CVA risk under Pillar 3 through Table CVAA and Templates CVA1 and CVA2.
What banks should do
The comment window closed on 28 August 2026. Until final Directions are issued, a bank can check its aggregate notional of non-centrally cleared derivatives against the ₹10 lakh crore threshold and decide which of the three routes it would follow.
Questions and answers
What is the CVA capital charge?
It is the capital a bank holds against CVA risk — the risk of losses from changes in Credit Valuation Adjustment values caused by shifts in counterparty credit spreads and market risk factors on its derivative transactions.
Which approach does the draft prescribe?
The basic approach (BA-CVA). A bank may choose the full version, which recognises counterparty credit spread hedges, or the reduced version, which does not.
Is there a simpler option for banks with small derivative books?
Yes, in the draft. A bank whose aggregate notional amount of non-centrally cleared derivatives is ₹10 lakh crore or less may set its CVA capital requirement equal to 100 per cent of its counterparty credit risk capital requirement. It cannot recognise CVA hedges and must apply this to its entire portfolio of covered transactions.
Which banks are covered?
Commercial banks — banking companies other than Small Finance Banks, Payments Banks and Local Area Banks, corresponding new banks and the State Bank of India.
When would the new framework apply?
The draft proposes 1 April 2027. It is not final; comments were invited till 28 August 2026 and that period has ended.
Published 7 August 2026. Updated 8 October 2026. This report is for general information and is not professional advice. Read the source document before acting on it.