{"id":3530,"date":"2023-03-02T05:02:59","date_gmt":"2023-03-01T23:32:59","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=3530"},"modified":"2025-03-26T12:57:16","modified_gmt":"2025-03-26T07:27:16","slug":"what-is-the-expected-credit-loss-ecl-regime","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/what-is-the-expected-credit-loss-ecl-regime\/","title":{"rendered":"What is the Expected Credit Loss (ECL) Regime?"},"content":{"rendered":"<h2><strong>Why in News?<\/strong><\/h2>\n<ul>\n<li>The Reserve Bank of India (RBI) recently proposed to move the banking system to an expected credit loss-based provisioning approach from an \u201cincurred loss\u201d approach.<\/li>\n<\/ul>\n<h3>What is a loan-loss provision?<\/h3>\n<ul>\n<li>The RBI defines a loan loss provision as an <strong>expense that banks set aside for defaulted loans.<\/strong><\/li>\n<li>Banks set aside a <strong>portion of the expected loan repayments from all loans<\/strong> in their portfolio <strong>to cover the losses either completely or partially<\/strong>.\u00a0<\/li>\n<li>In the event of a loss, instead of taking a loss in its cash flows, the <strong>bank can use its loan loss reserves to cover the loss.<\/strong><\/li>\n<li>The level of loan loss provision is <strong>determined based on the level expected to protect the safety and soundness of the bank.<\/strong><\/li>\n<\/ul>\n<h3>What is the Expected Credit Loss (ECL) regime?<\/h3>\n<ul>\n<li>Under this practice, a <strong>bank is required to estimate expected credit losses based on forward-looking estimations<\/strong> rather than wait for credit losses to be actually incurred <strong>before making corresponding loss provisions.<\/strong><\/li>\n<li>As per the proposed framework, <strong>banks will need to classify financial assets<\/strong> (primarily loans) <strong>as Stage 1, 2, or 3<\/strong>, <strong>depending on their credit risk profile,<\/strong> with Stage 2 and 3 loans having higher provisions <strong>based on the historical credit loss patterns observed by banks<\/strong>.<\/li>\n<li>This will be in <strong>contrast to the <\/strong>existing approach of <strong>incurred loss provisioning<\/strong>, <strong>whereby <\/strong>step-up <strong>provisions are made based on the time the account has remained in the Non-Performing Asser (NPA) <\/strong>category<strong>.<\/strong><\/li>\n<li><strong>Benefits of the ECL regime<\/strong>:\n<ul>\n<li>It will <strong>result in excess provisions<\/strong> <strong>as compared to a shortfall in provisions<\/strong>, as seen in the incurred loss approach.<\/li>\n<li>It will further <strong>enhance the resilience of the banking system<\/strong> in line with globally accepted norms.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3>What is the problem with the incurred loss-based approach?<\/h3>\n<ul>\n<li>It <strong>requires banks to provide for losses that have already occurred or been incurred.<\/strong><\/li>\n<li>The <strong>delay in recognizing loan losses resulted in banks having to make higher levels of provisions <\/strong>which affected the bank&#8217;s capital. This affected banks\u2019 resilience and posed systemic risks.<\/li>\n<li>The <strong>delays in recognizing loan losses<\/strong> <strong>overstated the income generated by the banks, <\/strong>which, coupled with dividend payouts, <strong>impacted their capital base<\/strong>.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<hr \/>\n<h3>Q1)\u00a0What is a Non-Performing Asset (NPA)?<\/h3>\n<p>A NPA refers to a classification for loans or advances that are in default or in arrears. A loan is in arrears when principal or interest payments are late or missed. A loan is in default when the lender considers the loan agreement to be broken and the debtor is unable to meet his obligations.<\/p>\n<p><strong>Source:<\/strong>\u00a0<a href=\"https:\/\/www.financialexpress.com\/industry\/banks-can-absorb-expected-credit-loss-regime-impact-india-ratings\/2996698\/\" target=\"_blank\" rel=\"nofollow noopener\"><u>Banks can absorb expected credit loss regime impact: India Ratings<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Under the Expected Credit Loss regime, a bank is required to estimate credit losses based on forward estimations.<\/p>\n","protected":false},"author":5,"featured_media":3531,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"class_list":{"0":"post-3530","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-prelims-current-affairs","8":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/3530","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\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=3530"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/3530\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/3531"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=3530"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=3530"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=3530"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}