RBI eases capital rules for banks under Emergency Credit Guarantee Scheme 5.0

The Reserve Bank of India (RBI) has eased capital requirements for banks on loans backed by the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0 by allowing a zero-risk weight on a substantial portion of such exposures.

In a notification, the central bank said exposures guaranteed under ECLGS 5.0 would attract a risk weight of 0% to the extent of 75% of the guaranteed portion, provided the settlement amount is expected to be received within 30 days from the date of invocation of the guarantee.

"The remaining exposure shall attract risk weight as per the extant guidelines," the RBI said in its amendment to the Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025.

The amendment has come into force with immediate effect.

Risk weights determine the amount of regulatory capital that banks are required to set aside against their assets. A lower risk weight reduces the capital that lenders need to hold against an exposure, potentially improving their capital position and increasing their capacity to extend credit.

The move follows a circular issued by the National Credit Guarantee Trustee Company (NCGTC) on May 8 in respect of ECLGS 5.0, the latest iteration of the government's credit guarantee programme.

The Emergency Credit Line Guarantee Scheme was initially launched by the government during the Covid-19 pandemic to provide emergency credit support to businesses, particularly micro, small and medium enterprises (MSMEs), by offering sovereign-backed guarantees on additional loans extended by banks and other lenders.

The latest RBI amendment provides regulatory clarity on the capital treatment of loans covered under ECLGS 5.0 and is expected to lower the capital charge on eligible guaranteed exposures.

By assigning a zero-risk weight to a large part of the guaranteed exposure where claim settlement is expected within 30 days of guarantee invocation, the central bank has aligned the prudential treatment of such loans with the credit protection offered under the scheme.

The notification was issued under Section 35A of the Banking Regulation Act, 1949, and forms part of the Ninth Amendment to the RBI's prudential norms on capital adequacy for commercial banks.

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