Reserve Bank of India Finalizes New CVA Capital Framework

The Reserve Bank of India finalized a Credit Valuation Adjustment (CVA) framework that mandates commercial banks to hold capital against risks stemming from the deteriorating creditworthiness of derivative contract counterparties. The rules take effect on April 1, 2027, a deadline the central bank maintained to ensure alignment with Basel III compliance mandates despite requests from stakeholders for a deferral.

The framework applies to commercial banks but excludes local area banks, payments banks, and small finance banks. The RBI provides two primary paths for compliance based on the volume of non-centrally cleared derivatives. Banks with such derivatives totaling Rs 10 lakh crore or less may use a simpler alternative treatment, where the CVA capital requirement equals 100 percent of the counterparty credit risk capital requirement and hedges are not recognized.

Banks exceeding the Rs 10 lakh crore threshold must implement the Basic Approach for CVA (BA-CVA). These institutions can choose between a full version that recognizes credit default swaps or a reduced version designed for banks that do not actively hedge their positions.