RBI proposes Expected Credit Loss framework for banks, effective April 2027

Core Viewpoint - The Reserve Bank of India (RBI) proposed to replace the incurred-loss-based provisioning framework with an expected credit loss (ECL)-based framework for banks, effective April 1, 2027, to align with global standards [1][4]. Group 1: Proposed Framework Details - The new ECL framework will introduce staging criteria for asset classification while maintaining existing Non-performing Asset (NPA) classification norms [2]. - It will set calibrated ceilings for broad exposure classes under Stages 1, 2, and 3, and align income recognition norms based on the Effective Interest Rate (EIR) method [2]. - The framework will also include principles for model risk management in implementing ECL models [2]. Group 2: Capital Impact - The RBI anticipates minimal overall impact on the minimum regulatory capital requirements for banks, with a one-time provisioning expected but manageable within a proposed 5-year glide-path [3]. Group 3: Impact on Specific Banks - Microfinance-focused banks, such as Bandhan Bank, IndusInd Bank, RBL Bank, AU Small Finance Bank, and IDFC First Bank, are expected to be most affected due to their higher exposure to micro loans [5][6]. - The State Bank of India (SBI) initially estimated a need for around ₹25,000 crore in provisions, which has now been reduced to below ₹20,000 crore [7]. - Among large private banks, Kotak Mahindra Bank may face significant impacts due to a lower buffer, while Axis Bank is expected to experience a mild effect [7].