Mumbai, Aug. 8 -- The Reserve Bank of India (RBI) has proposed new rules requiring banks to keep adequate capital to cover potential losses on certain financial contracts when the financial condition of the other party deteriorates.

The proposed rules will replace RBI's existing Credit Valuation Adjustment (CVA) framework, which was issued in 2011, and bring the regulations in line with updated international banking standards.

CVA essentially accounts for the possibility that the value of a financial contract, such as a derivative, may decline because the party on the other side becomes financially weaker and its risk of default increases. The capital requirement is intended to ensure that banks have sufficient funds to absorb such risk...