{"id":101392,"date":"2026-05-02T11:22:28","date_gmt":"2026-05-02T05:52:28","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=101392"},"modified":"2026-05-02T11:22:28","modified_gmt":"2026-05-02T05:52:28","slug":"rbis-expected-credit-loss-norms","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/rbis-expected-credit-loss-norms\/","title":{"rendered":"RBI\u2019s Expected Credit Loss Norms for Bank Provisioning"},"content":{"rendered":"<h2 style=\"text-align: justify;\"><strong>Expected Credit Loss Latest News<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Reserve Bank of India\u2019s new Expected Credit Loss framework may cause a one-time capital impact of up to 120 basis points on banks\u2019 Common Equity Tier-1 ratios, according to CRISIL Ratings.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Expected Credit Loss Framework<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Expected Credit Loss (ECL) framework is a <\/span><b>method used by banks to estimate possible future losses from loans and other credit exposures<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It requires banks to make provisions not only after a loan turns bad, but also on the basis of expected future credit risk.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">At present, Indian banks broadly follow the incurred loss model, where provisions are made after signs of stress appear or when a loan becomes a <\/span><strong><a href=\"https:\/\/vajiramandravi.com\/current-affairs\/npa\/\" target=\"_blank\">non-performing asset<\/a><\/strong><span style=\"font-weight: 400;\"> (NPA).\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Under the ECL framework, banks will follow a more forward-looking approach. This means they will assess the probability of default, possible loss if default occurs, and exposure at the time of default.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The RBI\u2019s new norms will come into effect from April 1, 2027. They are broadly aligned with global accounting practices such as <\/span><b>IFRS 9<\/b><span style=\"font-weight: 400;\">, which was adopted internationally after the global financial crisis to make banking systems more resilient.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Need for ECL Norms<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The ECL framework is important because the traditional incurred-loss model often recognises loan stress too late.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Banks may continue to show healthy books until a loan actually defaults, even when early warning signs are visible.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A forward-looking model helps banks prepare for future risks in advance. It also improves transparency, strengthens risk management, and reduces the chance of sudden shocks to bank balance sheets.\u00a0<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Three-Stage Asset Classification<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Under the new framework, loans will be classified into three stages based on the level of credit risk.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Stage I<\/b> <b>includes loans with low or no significant increase in credit risk<\/b><span style=\"font-weight: 400;\">. For these assets, banks will recognise provisions based on 12-month expected credit loss.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Stage II<\/b> <b>includes loans where credit risk has increased significantly<\/b><span style=\"font-weight: 400;\">, although they have not yet become NPAs. For these loans, banks will have to make provisions based on lifetime expected credit loss.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Stage III<\/b> <b>includes credit-impaired assets or NPAs<\/b><span style=\"font-weight: 400;\">. These are high-risk loans where banks will also have to recognise lifetime expected credit loss.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This classification marks a major shift because banks will now have to provide more for stressed loans that have not yet crossed the traditional 90-day overdue threshold for NPAs.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Impact on Banks<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">According to CRISIL Ratings, the transition to ECL could have a gross impact of up to 170 basis points on the Common Equity Tier-1 (CET-1) ratio of most banks. After factoring in provisions already made, the net impact may be up to 120 basis points.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">CET-1 is the highest quality capital of a bank and acts as a cushion during financial stress. A fall in this ratio means that banks may have less capital available for lending or absorbing losses.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">However, the impact is expected to remain manageable because Indian banks are currently well capitalised.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Their CET-1 ratio stood at around 14% as of March 31, 2026, supported by steady profitability and improved asset quality.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Banks will also be allowed to spread the transition impact over four financial years, which will reduce the immediate pressure on capital. Additional provisioning buffers already maintained by some banks may further cushion the effect.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Higher Provisioning and Credit Costs<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The most significant impact is expected from Stage II assets, where provisioning requirements will rise sharply compared to the current system.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">However, CRISIL has noted that <\/span><b>Stage II assets form only about 2-2.2% of the banking system<\/b><span style=\"font-weight: 400;\">, which will help contain the overall burden.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The new framework will also cover off-balance-sheet exposures and undisbursed credit limits, increasing the provisioning requirement.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This means banks must consider risks not only from loans already disbursed but also from committed credit lines.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Experts believe that the <\/span><b>ECL regime may lead to a structural rise in credit costs<\/b><span style=\"font-weight: 400;\">. Banks with higher exposure to microfinance, unsecured retail loans, and other riskier segments may face a greater impact.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Some of these costs may be passed on to borrowers through higher interest rates or charges.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>New NPA Classification Rules<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The new norms also strengthen NPA classification. The duration for classifying a loan as an NPA will continue to be 90 days overdue. However, classification will be at the borrower level, not merely the account level.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This means that <\/span><b>if one loan of a borrower turns bad, all loans of that borrower from the same bank may be treated as NPAs<\/b><span style=\"font-weight: 400;\">. Once classified as an NPA, the borrower will have to clear all liabilities before being upgraded back to standard asset status.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This provision is <\/span><b>expected to improve credit discipline among borrowers<\/b><span style=\"font-weight: 400;\"> and prevent selective repayment of loans.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Significance for Financial Stability<\/strong><\/h2>\n<ul>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The RBI\u2019s ECL norms come at a time when Indian banks are enjoying one of their best asset-quality phases, with net NPA ratios below 1% for most major banks. This makes the transition less disruptive.<\/span><\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The new norms will help banks detect stress earlier, build buffers in advance, and improve accountability in credit risk assessment. They will also make banking supervision more robust by reducing under-reporting of potential risks.<\/span><\/li>\n<\/ul>\n<p><b>Source:<\/b> <strong><a href=\"https:\/\/www.pressreader.com\/india\/the-hindu-international-9bn2\/20260502\/281925959621662\" target=\"_blank\" rel=\"nofollow noopener\">TH<\/a> | <a href=\"https:\/\/economictimes.indiatimes.com\/industry\/banking\/finance\/banking\/rbis-expected-credit-loss-framework-banks-face-120-bps-hit-but-stability-prevails\/articleshow\/130671133.cms?from=mdr\" target=\"_blank\" rel=\"nofollow noopener\">ET<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>RBI Expected Credit Loss norms will shift Indian banks from an incurred-loss model to a forward-looking provisioning system from April 2027.<\/p>\n","protected":false},"author":21,"featured_media":101414,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[7280,60,22,59],"class_list":{"0":"post-101392","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-expected-credit-loss","9":"tag-mains-articles","10":"tag-upsc-current-affairs","11":"tag-upsc-mains-current-affairs","12":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/101392","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/21"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=101392"}],"version-history":[{"count":3,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/101392\/revisions"}],"predecessor-version":[{"id":101410,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/101392\/revisions\/101410"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/101414"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=101392"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=101392"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=101392"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}