RBI amends Small Finance and Commercial Bank Directions by deleting para 37, removing limits on non-option derivative contracts. Signals deregulatory shift in hedging norms.
RBI Withdraws Derivative Contract Limits for SFBs, Commercial Banks
The Reserve Bank of India (RBI) has issued amendment directions removing paragraph 37 from both the Small Finance Banks (Miscellaneous) Directions, 2025, and the Commercial Banks (Miscellaneous) Directions, 2025. The deleted provision previously imposed quantitative limits on non-option derivative contracts, which are used for hedging currency and interest rate risks.
The deletion, effective immediately, allows small finance banks (SFBs) and commercial banks greater flexibility in managing their balance sheet exposures through over-the-counter (OTC) derivatives. This move aligns with RBI’s broader push towards market-based risk management and aligns domestic frameworks with international banking standards. The regulator cited evolving risk frameworks and improved supervisory oversight as justifications for the withdrawal.
For banking and corporate legal advisors, this amendment signals a shift toward prudential rather than prescriptive regulation. Institutions must now ensure internal risk management policies are robust enough to support increased derivative activity, particularly in foreign exchange and interest rate portfolios, to meet supervisory expectations under Master Direction - Risk Management and Inter-Bank Dealings.
