RBI issues revised Net Open Position rules for Small Finance Banks from April 1, 2027

Background and regulatory context

The Reserve Bank of India has notified the Reserve Bank of India (Small Finance Banks – Prudential Norms on Capital Adequacy) Seventh Amendment Directions, 2026, which will be effective from April 1, 2027.

These Amendment Directions specifically focus on the manner in which Small Finance Banks (SFBs) compute their Net Open Position (NOP) in foreign currency and gold. The change is intended to:

  • Harmonise the NOP computation framework with international best practices, and
  • Ensure uniform adoption of the methodology across all SFBs that undertake foreign exchange business.

The RBI has drawn reference to Annex I of the FMRD Master Direction – Risk Management and Inter-Bank Dealings (Master Direction No. 1/2016-17 dated July 5, 2016), which, among other things, lays down the methodology for NOP computation. The present amendment tailors and embeds this methodology into the prudential capital framework for SFBs.

The directions are issued under the authority of Section 35A of the Banking Regulation Act, 1949, along with other enabling statutory provisions. The RBI has recorded its satisfaction that such measures are required in the public interest to strengthen risk management standards in the SFB segment.

The formal circular is issued as:

Reserve Bank of India
RBI/2026-27/156
DOR.MRG.REC.No.142/21-01-002/2026-27
Dated: June 24, 2026

Key regulatory change in Chapter IV – Market risk, operational risk, and NOP

Under the revised framework, Chapter IV – Calculation of risk weighted assets (RWAs) in the Reserve Bank of India (Small Finance Banks – Prudential Norms on Capital Adequacy) Directions, 2025 is modified.

The amended starting paragraph of Chapter IV now provides that:

  • Market risk and operational risk capital charges do not apply to an SFB,
  • However, every SFB must compute its Net Open Position in foreign exchange and gold strictly in accordance with the methodology prescribed in the new Annex VII.

This is a critical shift for SFBs that are Authorised Dealer Category-I banks, as they are already allowed to conduct a wide range of foreign exchange transactions and hence inherently bear forex risk exposure.

Introduction of Annex VII – Dedicated framework for NOP

A new Annex VII – Calculation of Net Open Position is inserted after Annex VI in the 2025 Directions. This Annex codifies a detailed and standardised approach to:

  • Identifying exposures in foreign currency and gold
  • Measuring single-currency positions
  • Aggregating these positions into an overall Net Open Position using a shorthand method
  • Setting out inclusions and exclusions, and
  • Aligning computation and reporting with benchmark-based spot rates and existing FMRD Master Directions.

Scope of application – When and to whom NOP applies

  1. Capital charge for forex risk:

    • SFBs are not presently required to maintain a separate capital charge for foreign exchange risk.
    • Nonetheless, SFBs that operate as Authorised Dealer Category I banks must monitor and calculate their NOP in line with Annex VII.

  2. Continuous calculation requirement:

    • Each SFB must compute the Net Open Position at the close of business every single working day.
    • This continuous monitoring makes NOP a daily risk metric, not a periodic or ad-hoc figure.

Items to be excluded from Net Open Position

Annex VII clearly earmarks certain exposures that must not be factored into NOP. These carve-outs avoid double-counting and maintain consistency with the regulatory capital framework.

1. Positions deducted from regulatory capital

Any exposure already deducted from the SFB’s regulatory capital is fully excluded from NOP, including:

  • The underlying position that has been deducted
  • Any hedging position specifically taken against such deducted exposure

This ensures that capital-deducted items do not re-enter the risk computation via NOP.

2. Capital instruments subject to 1250% risk weight or deduction

Holdings of capital instruments, where such instruments are either:

  • Deducted from the SFB’s capital; or
  • Assigned a 1250 per cent risk weight,

are not to be part of the Net Open Position. These include:

  • Holdings of the SFB’s own eligible regulatory capital instruments
  • Holdings of other banks’ and other financial entities’ eligible regulatory capital instruments
  • Intangible assets that are deducted from regulatory capital

By excluding these, the framework avoids overlapping risk treatment across credit, market, and capital adequacy perspectives.