Expected credit loss rules: New provisioning framework to come into force in April 2027

KOLKATA/MUMBAI: The Reserve Bank of India (RBI) Monday said it would go ahead with the implementation of the expected credit loss (ECL) framework from April 1, 2027, dashing expectations that lenders would be given a more relaxed compliance timeframe. The transition to the new asset classification norms will require banks to make higher provisions on stressed loans, and doing so is expected to impact their capital adequacy ratios.

The new ECL guidelines would introduce a “staging framework” for asset classification under the ECL approach, replacing the existing incurred-loss-based provisioning framework. However, the central bank said in a note that it would retain the current 90-day overdue rule for classifying non-performing assets (NPA).

In a report after draft norms were released in October rating agency Moodys said the new norms will have a minimal impact on banks’ capital.”We expect the proposed regulations to reduce the tangible common equity for banks by 50-80 bps. Since the implementation will be phased over four years, allowing banks to avoid a significant day-one reduction of capital, most banks are likely to absorb the decline in capital ratios through more conservative dividend payouts,” said Moody’s analysts.

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Under the ECL framework, banks would be required to adopt a forward-looking provisioning approach as well as the effective interest rate method. The RBI said the new approach is expected to strengthen the resilience, transparency and consistency of the banking sector, as banks will be required to build buffers based on likely credit losses.

The central bank said it has provided a calibrated transition framework, including a one-time capital impact arrangement and a three-year timeline for applying the effective interest rate method to legacy loan accounts.

Also Read: RBI asks banks to report overseas rupee OTC derivative contracts to CCILUnder the framework, banks will classify assets into three buckets-Stage 1, Stage 2 and Stage 3-and build buffers based on expected losses. Stage 1 assets are those where there is no significant increase in credit risk and will attract a 12-month ECL. Stage 2 assets are those where credit risk has increased but the asset is not credit-impaired. Stage 3 assets are credit-impaired. For both Stage 2 and Stage 3 assets, lifetime ECL will be recognised.

ECL represents a probability-weighted estimate of credit losses measured over the relevant time horizon of the financial instrument, the RBI said.