RBI’s 2026 Overhaul of Concentration Risk Rules for Small Finance Banks: Capital Market Exposure Framework Explained

The Reserve Bank of India has substantially overhauled the concentration risk framework applicable to Small Finance Banks (SFBs) through the Reserve Bank of India (Small Finance Banks – Concentration Risk Management) Amendment Directions, 2026 – (Revised), dated March 30, 2026.

These revised directions reshape how SFBs must measure, monitor and cap their Capital Market Exposures (CME), align definitions with the updated Reserve Bank of India (Small Finance Banks – Credit Facilities) Directions, 2025, and specify what must be included or excluded while computing exposure to capital markets.

The revised framework will become effective from the date an SFB chooses to adopt the amended credit facility directions of 2026 (Revised) or from July 1, 2026, whichever is earlier. Once in force, these directions will override the earlier Reserve Bank of India (Small Finance Banks – Concentration Risk Management) Amendment Directions, 2026 dated February 13, 2026.

Statutory Basis and Background

The amendments are issued by RBI in exercise of powers under:

  • Section 21 and Section 35A of the Banking Regulation Act, 1949, and
  • Other enabling provisions of law empowering RBI to regulate banking operations in the public interest.

The Reserve Bank of India (Small Finance Banks – Concentration Risk Management) Directions, 2025 form the base framework, and the present 2026 (Revised) amendments modify that original structure, especially in relation to capital market exposure, definitions and prudential limits.

Key New Definitions Introduced

Alignment with Credit Facilities Directions

To ensure consistency across regulatory instructions, the amendment introduces and aligns certain key expressions with the Reserve Bank of India (Small Finance Banks – Credit Facilities) Directions, 2025. The following terms are now formally added to Chapter I – Preliminary of the 2025 Directions:

  1. “Capital Market Intermediaries (CMIs)”

    • Will carry exactly the same meaning as ascribed in the Reserve Bank of India (Small Finance Banks – Credit Facilities) Directions, 2025.
    • This alignment is critical because all credit facilities extended to CMIs are now clearly brought within the CME framework.

  2. “Collateral Security” / “Collateral”

    • Also adopts the same meaning as under the Reserve Bank of India (Small Finance Banks – Credit Facilities) Directions, 2025.
    • This ensures that whether a security is treated as “primary” or “collateral” is consistent across all prudential instructions.

  3. “Non-debt Mutual Funds”

    • Newly clarified to mean mutual fund schemes whose corpus is not exclusively invested in debt securities.
    • This definition is central because a number of CME-related inclusions and exclusions are based on whether a mutual fund scheme is a non-debt fund.

  4. “Primary Security”

    • Again, adopts the same meaning as in the Reserve Bank of India (Small Finance Banks – Credit Facilities) Directions, 2025.
    • The demarcation between primary and collateral security impacts whether certain loans fall inside or outside CME for capital market risk purposes.

Alongside these insertions, paragraph 3(7) of the original 2025 Directions is deleted, removing earlier language that is now redundant in light of these new definitions.

Role of the Board: Revised Intra-Day Capital Market Exposure Policy

Mandate for Board-Approved Intra-Day Limits

Within Chapter II — Role of the Board, sub-subparagraph 6(1)(iv) is replaced. SFBs must now ensure that their Board-approved risk policies explicitly:

  • Lay down a policy for fixing intra-day exposure limits to capital markets, and
  • Ensure such limits remain within the prudential CME ceilings specified under the revised directions.

This clearly brings intraday dealings – often substantial in volume – within the formal risk governance framework and links them to board oversight.

Redesign of Capital Market Exposure Norms

The most important part of the revised amendment is the complete recasting of the capital market exposure regime contained in Chapter IV – Exposure Norms.

Deletion of Existing Provisions and Insertion of New CME Regime

Several earlier paragraphs (including paragraph 28 and multiple sections/paragraphs relating to old capital market limits) are removed and replaced with a single, comprehensive framework built around “Capital Market Exposures (CME)”.

What Constitutes Capital Market Exposure (CME)? – New Paragraph 28A

Under new paragraph 28A, the CME of an SFB is defined to include both direct and indirect exposures, covering both fund-based and non-fund-based dealings. These are grouped into:

1. Investment Exposures

Direct investments by the bank in:

  • Equity shares
  • Preference shares
  • Convertible bonds
  • Convertible debentures
  • Units of Non-debt Mutual Fund schemes
  • Units of REITs and InvITs
  • Units of Alternative Investment Funds (AIFs)

All of the above are counted as direct capital market exposure for the purpose of prudential ceilings.

2. Credit Exposures

Indirect or credit-based exposures connected to capital markets include: