India central bank rejects request to allow credit derivatives on loans

The Reserve Bank of India (RBI) has not approved the introduction of credit derivatives on loans, despite ongoing discussions about expanding the country’s credit risk transfer tools. The central bank’s 2026 draft revised Credit Derivatives Directions outlines a framework for total return swaps (TRS) and credit index derivatives, but it explicitly excludes derivatives directly referencing loans. Instead, eligible instruments include corporate bonds, debentures, and certain infrastructure securities, with the aim of deepening India’s corporate bond markets while maintaining financial stability.

The RBI’s decision reflects a cautious approach to derivatives, emphasizing the need for robust risk management and governance. The draft directions stipulate that at least one counterparty in every credit derivative transaction must be an eligible market maker, such as a scheduled commercial bank or a systemically important non-banking financial company (NBFC). This requirement is intended to prevent speculative or opaque exposures that could destabilize the financial system.

While the move to expand credit derivatives has been welcomed by some market participants as a step toward more sophisticated risk management, others have raised concerns about the complexity and liquidity of these instruments. The RBI’s focus on institutional-grade participants and its exclusion of loan-based derivatives suggest controlled development over rapid liberalization.

As the central bank finalizes its framework, stakeholders are encouraged to provide feedback on the proposed rules, particularly regarding eligibility thresholds, reference asset scope, and regulatory coordination with other financial authorities.