The RBI has amended derivative exposure limits for commercial and small finance banks under Section 35A of the Banking Regulation Act, 1949, to strengthen risk management.
RBI Caps Non-Option Derivative Contracts for Banks
The Reserve Bank of India has issued the Reserve Bank of India (Commercial Banks – Miscellaneous) Second Amendment Directions, 2026 and the Small Finance Banks - Miscellaneous Amendment Directions, 2026, effective October 19, 2026. Both amendments revise Section C of Chapter IV to set revised limits on non-option derivative contracts, aiming to mitigate market and credit risk exposure in banking portfolios.
The changes, enacted under Section 35A of the Banking Regulation Act, 1949, allow the RBI regulatory authority to issue directions to banks in the public interest. The revised caps are designed to prevent excessive speculation and ensure prudent risk-taking, particularly in volatile foreign exchange and interest rate markets.
These amendments require immediate review by legal and compliance teams in financial institutions. Banks must align trading practices with the tightened norms and update internal risk assessment frameworks. For practitioners, this underscores the need for robust regulatory due diligence in advising banks on derivative products and compliance with evolving prudential norms.
Citations
- Banking Regulation Act, 1949, Section 35A
