The RBI has amended derivative exposure limits for Small Finance Banks under the Banking Regulation Act, citing risk control. The changes affect non-option derivative contracts.
RBI Tightens Derivative Limits for Small Finance Banks
The Reserve Bank of India has issued the Small Finance Banks – Miscellaneous (Amendment) Directions, 2026, effective October 19, 2026, amending Section C on 'Limits for Non-Option Derivative Contracts' under Chapter IV of the 2025 Directions. The amendment, issued under Section 35A of the Banking Regulation Act, 1949, imposes tighter restrictions on derivative exposures.
The revised limits are designed to curb speculative risk in smaller institutions with limited risk management infrastructure. The RBI cited concerns over un-hedged foreign currency positions and concentration risk in interest rate derivatives as key motivations.
Small Finance Banks must now ensure that gross notional value of non-option derivatives does not exceed a specified percentage of Tier I capital, with stricter intra-day monitoring requirements. Exposures beyond thresholds require board-level approval and prior notification to the RBI.
Compliance officers must recalibrate trading policies and update internal limits. Legal advisors should assist in reviewing treasury operations frameworks and reinforcing governance protocols around market risk.
Citations
- RBI/2026-27/295
- Banking Regulation Act, 1949, Section 35A
