**Executive Summary**
The Reserve Bank of India (RBI) has issued the Second Amendment Directions, 2026, concerning Prudential Norms on Capital Adequacy for Small Finance Banks (SFBs). This amendment, effective from April 1, 2027, revises the methodology for computing Net Open Position (NOP) as outlined in the Reserve Bank of India (Small Finance Banks - Prudential Norms on Capital Adequacy) Directions, 2025. The aim is to align with international standards and ensure consistent implementation across SFBs.
**Key Points / Main Content**
* **Purpose:** To amend the methodology for computation of Net Open Position (NOP) for Small Finance Banks (SFBs).
* **Amendment Scope:** Amends the Reserve Bank of India (Small Finance Banks - Prudential Norms on Capital Adequacy) Directions, 2025.
* **Effective Date:** These directions shall come into effect from April 1, 2027.
* **Amendment to Chapter IV (Calculation of Risk Weighted Assets (RWAs)):**
* Market and operational risk capital charges shall not be applicable to a bank.
* Banks must compute the Net Open Position (NOP) for foreign exchange and gold positions as per the methodology specified in Annex VII.
* **Annex VII - Calculation of Net Open Position:**
* SFBs operating as Authorised Dealer Category I banks must monitor their Net Open Position (NOP) as per the prescribed paragraphs.
* SFBs shall calculate the net open position on a continuous basis (at the close of each business day).
* Positions deducted from regulatory capital and holdings of certain capital instruments are excluded from the net open position calculation.
* Securities that have matured/remain unpaid or classified as non-performing assets are excluded from the net open position calculation.
* SFBs must include all foreign currency (including gold) positions within the "Scope of Application" of the directions, regardless of whether they are in the trading book or banking book.
* SFB's net open position in each currency is calculated by summing net spot position, net forward position, guarantees, net future income/expenses, any other item representing profit/loss in foreign currencies, and the net delta-based equivalent of the total book of foreign currency options.
* Positions in composite currencies must be separately maintained, but may be treated as a single currency or split into components. Positions in gold must be expressed in standard units.
* Interest, other income, and expenses are treated as specified, including accruing interest and expenses.
* Derivative positions are measured using net present values.
* SFBs shall use a shorthand method to measure foreign exchange risk in a portfolio of foreign currency positions and gold.
* SFBs may define their own end of business day timings via internal policy, but it must be followed consistently.
**Impact Analysis**
**Small Finance Banks (SFBs)**
**Impact:** SFBs operating as Authorised Dealer Category I banks must now compute and monitor their Net Open Position (NOP) as per the updated methodology, which includes specific inclusions and exclusions for various asset types and currency positions.
**Action Required:** SFBs need to:
1. Implement the updated NOP calculation methodology as per Annex VII.
2. Ensure continuous calculation of NOP at the close of each business day.
3. Establish an internal policy regarding the yield curve for derivative positions and consistently apply it.
4. Follow a consistent and duly approved internal policy for determining the end of business day for NOP calculation.
**RBI (Reserve Bank of India)**
**Impact:** The RBI has established a more aligned and standardized framework for the computation of the Net Open Position (NOP) by Small Finance Banks (SFBs).
**Action Required:** Enforce and monitor the implementation of the amended directions by the SFBs.
Key Entities Referenced
Reserve Bank of India (Small Finance Banks - Prudential Norms on Capital Adequacy) Directions, 2025: The primary Directions being amended related to capital adequacy norms for Small Finance Banks.
Reserve Bank of India (Small Finance Banks - Prudential Norms on Capital Adequacy) Second Amendment Directions, 2026: Amendment Directions to the prudential norms on capital adequacy for Small Finance Banks.
Small Finance Banks: The financial institutions to which the directions apply.
FMRD Master Direction No. 1/2016-17 - Master Direction - Risk Management and Inter-Bank Dealings: Referenced Master Direction related to Risk Management and Inter-Bank Dealings that prescribes the methodology for computation of Net Open Position.
Section 35A of the Banking Regulation Act, 1949: The section under which the Reserve Bank of India is exercising its powers.
भारतीय ररज़र्व बैंक
RESERVE BANK OF INDIA
_________________________ ______________________
www.rbi.org.in
Draft for comments
RBI/2025-26/
DOR.MRG.REC.No. //2025-26 XX 2026
Reserve Bank of India (Small Finance Banks - Prudential Norms on Capital
Adequacy) Second Amendment Directions, 2026
Please refer to Annex I of the FMRD Master Direction No. 1/2016-17 - Master Direction
- Risk Management and Inter-Bank Dealings which inter alia prescribes the
methodology for computation of Net Open Position. In order to ensure greater
alignment with international standards and consistent implementation across Small
Finance Banks, there is a felt need to review and specify the methodology for
computation of Net Open Position by amending the Reserve Bank of India (Small
Finance Banks - Prudential Norms on Capital Adequacy) Directions, 2025.
2. Accordingly, in exercise of the powers conferred by Section 35A of the Banking
Regulation Act, 1949 and all other provisions / laws enabling the Reserve Bank of
India (RBI) to issue instructions in this regard, the Reserve Bank being satisfied that it
is necessary and expedient in the public interest so to do, hereby issues the
Amendment Directions hereinafter specified.
3. (i) These instructions shall be called the Reserve Bank of India (Small Finance
Banks - Prudential Norms on Capital Adequacy) Second Amendment Directions,
2026.
(ii) These Amendment Directions shall come into effect from April 1, 2027.
4. The Reserve Bank of India (Small Finance Banks - Prudential Norms on Capital
Adequacy) Directions, 2025 are amended as provided below:
विवियमि विभाग,केंद्रीय कायाालय, 12 िीं और 13 िीं मंविल, केंद्रीय कायाालय भिि, शहीद भगत स ंह मागा,फोर्ा,म ंबई-400001
दरू भाष: 022-22601000 फैक् : 022-22705691 ई-मले : cgmicdor@rbi.org.in
_____________________________________________________________________________________________________________________________________
Department of Regulation, Central Office, 12th and 13th Floor, Central Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai- 400 001
Tel: 022- 2260 1000 Fax: 022-2270 5691 email: cgmicdor@rbi.org.in
सहदं ी आ ाि ह ैइ का प्रयोग बढाइएi. In the extant Directions, the beginning of Chapter IV - Calculation of risk
weighted assets (RWAs) stands amended with the insertions as highlighted,
namely:-
‘Market risk and operational risk capital charges shall not be applicable to a
bank. However, a bank shall compute the Net Open Position (NOP) for its
foreign exchange and gold positions as per methodology specified in
Annex VII.’
ii. In the extant Directions, Annex VII shall be inserted after Annex VI as given
below:
'Annex VII
Calculation of Net Open Position
1. Currently, an SFB is not required to calculate and maintain capital charge for foreign
exchange risk. However, an SFB which is operating as an Authorised Dealer Category
I bank, in terms of the applicable RBI guidelines, is required to inter alia monitor its Net
Open Position. For this purpose, Net Open Position shall be calculated as per the
paragraphs below.
A. Scope of Application
2. An SFB shall calculate the net open position on a continuous basis, i.e., at the close
of each business day.
Exclusions from net open position
3. An SFB shall not include in the net open position any position that is deducted from
the SFB’s regulatory capital, including a position that is hedging such a position.
4. Holdings of capital instruments that are deducted from an SFB’s capital or risk
weighted at 1250 per cent are not required to be included in the net open position.
This includes:
(i) holdings of the SFB’s own eligible regulatory capital instruments; and
(ii) holdings of other banks’ and other financial entities’ eligible regulatory capital
instruments, as well as intangible assets, where such assets are deducted from
capital.
25. An SFB shall not include in the net open position calculation, securities which are
a) already matured and remain unpaid; or b) have been classified as a non-performing
asset / investment.
B. Calculation of Net Open Position
6. For calculating the net open position, an SFB shall include all positions, within the
‘Scope of Application’ in section A above, in foreign currencies, including gold,
regardless of whether these are in the trading book or banking book.
7. The net open position shall be calculated as under:
(i) Measure the exposure in a single currency position as set out in sub-paragraphs
8 to 12.
(ii) Measure the risks inherent in an SFB’s mix of long and short positions in
different currencies as set out in paragraphs 13 to 15.
Measuring the exposure in a single currency
8. The SFB’s net open position in each currency shall be calculated by summing:
(i) the net spot position (i.e., all asset items less all liability items, including accrued
interest, denominated in the currency in question);
(ii) the net forward position (i.e., all amounts to be received less all amounts to be
paid, as indicated in sub-paragraph 9 below);
(iii) guarantees (and similar instruments) that are certain to be called and are likely
to be irrecoverable;
(iv) net future income / expenses not yet accrued / due, but where the amounts are
certain and have been fully hedged by the SFB, at its discretion;
(v) any other item representing a profit or loss in foreign currencies; and
(vi) the net delta-based equivalent of the total book of foreign currency options.
9. The net forward position includes:
(i) tom and spot transactions which are not yet settled;
(ii) forward and futures transactions; and
(iii) principal on currency swaps and any other derivative transactions not included
3in the spot position.
10. Positions in composite currencies need to be separately maintained but, for
measuring an SFB’s net open position, may be either treated as a currency in their
own right or split into their component parts on a consistent basis. Positions in gold
(spot plus forward) shall be first expressed in terms of the standard unit of
measurement (tonnes / kilos / ounces, etc.), with the net position being valued at
current spot rates.
Explanation: Where gold is part of a forward contract (quantity of gold to be received
or to be delivered), any foreign currency exposure from the other leg of the contract
shall be reported as set out in sub-paragraph 8 above.
11. Interest, other income and expenses shall be treated as follows: Interest accrued
(i.e., earned but not yet received) and accrued expenses shall be included as a spot
position. Unearned but expected future interest and anticipated expenses may be
excluded unless the amounts are certain and the SFB has taken the opportunity to
hedge them. If an SFB includes future income / expenses it shall do so on a consistent
basis, and it would not be permitted to select only those expected future flows which
reduce its position.
12. Measurement of derivative positions: An SFB shall use the net present values of
derivative positions, including forward exchange contracts, discounted using current
interest rates and valued at current spot rates. An SFB may select the yield curve for
the purpose of present value adjustments, provided the same is selected in a manner
which is representative of the funding cost. An SFB shall have an internal policy
approved by its Asset Liability Committee (ALCO) regarding the yield curve / (s) to be
used and apply it on a consistent basis.
Measuring the foreign exchange risk in a portfolio of foreign currency positions and
gold
13. For measuring the foreign exchange risk in a portfolio of foreign currency positions
and gold, an SFB shall use a shorthand method which treats all currencies equally.
14. Under the shorthand method, the nominal amount (or net present value) of the net
position in each foreign currency and in gold is converted at spot rates into the
reporting currency. The overall net open position is measured by aggregating:
4(i) the sum of the net short positions or the sum of the net long positions, whichever
is greater; plus
(ii) the net position (short or long) in gold, regardless of sign.
Explanation: The spot rates to be used for this purpose shall be determined based on
the extent FEDAI guidelines.
Illustration: See example in Table below.
Table: Example of the shorthand measure of net open position
JPY EUR GBP CAD USD Gold
Net position per currency +50 +100 +150 -20 -180 -35
Net open position +300 -200 35
Overall net open position is the higher of either the net long currency positions or the
net short currency positions (i.e., 300) and of the net position in gold (35) = 335
15. Transactions undertaken by an SFB till the end of business day shall be included
for calculation of Net Open Position. The transactions undertaken after the end of
business day may be taken into the positions for the next day. For this purpose, an
SFB may define its own end of business day timings, but the same shall be determined
as per a duly approved internal policy and followed on a consistent basis.’
(Sunil T S Nair)
Chief General Manager
5