MFI heavy banks to be most impacted by ECL model, say experts

Core Insights - The Reserve Bank of India's (RBI) transition from incurred loss provisioning to expected credit loss (ECL) will significantly affect microfinance loan-focused banks, particularly Bandhan Bank, IndusInd Bank, RBL Bank, AU Small Finance Bank, and IDFC First Bank [1][2] Impact on Banks - ECL will be implemented for new loans starting April 2027 and for existing loans from April 2027 to March 2031, impacting microfinance institutions (MFIs) and state banks on existing loans [2] - The ECL model estimates potential future losses on loans, which may lead to higher provisioning requirements for banks, especially in the micro loan segment where delinquencies are typically higher [3] Provisions and Financial Impact - State Bank of India (SBI) initially estimated a need for around ₹25,000 crore in provisions under ECL norms, which has now been revised to below ₹20,000 crore [4] - IIFL Capital Securities predicts that public sector and mid-size banks may require additional provisions of 1-2% of loans, while large private banks with higher buffers will experience minimal to no impact [6] Strategic Implications - The shift to ECL is expected to enhance resilience and align Indian banks' provisioning practices with global standards, prompting a reevaluation of credit risk assessment and management [7] - Banks will need to adapt their product and pricing strategies, as well as improve data and governance capabilities to effectively integrate ECL into their operations [8]