New rules will bump up provisions, but SBI chair sees limited hit

Core Viewpoint - State Bank of India anticipates a limited impact from the transition to the expected credit loss (ECL) framework due to a long transition period that allows for increased provisioning against stressed loans [1][2]. Regulatory Changes - The Reserve Bank of India (RBI) has proposed a transition from the current "incurred loss" provisioning rule to an ECL framework, with a five-year glide path from April 1, 2027, to March 31, 2031 [3]. - The RBI has invited feedback on the draft circular by November 30 [3]. Classification of Financial Assets - Financial assets will be classified into three stages based on the increase in credit risk since initial recognition: Stage 1 (low risk), Stage 2 (rising risk), and Stage 3 (credit-impaired) [4]. Provisioning Requirements - Stage 1 requires a minimum provisioning rate of 0.40% for most standard loans, 0.25% for farm or MSME loans, and 1.0-1.25% for unsecured retail and project financing during construction [5]. - Stage 2 mandates a minimum 5% provisioning for the most deteriorated loans, 1.5% for secured retail loans, and 0.75-1.0% for operational project loans [6]. - Stage 3 has age-based provisioning floors ranging from 25-40% in the first year for secured or unsecured loans, increasing to 75-100% beyond 3-4 years, with unsecured retail loans requiring full provisioning after the first year [6]. Impact on Banks - Unsecured retail exposure to personal loans, credit cards, and microfinance may face a larger provisioning burden, while housing or gold loans may experience a lower incremental impact [8]. - The RBI estimates a one-time provisioning hit but expects the overall impact on minimum regulatory capital to be modest due to the transition path and existing capital buffers [8]. - Private banks are better positioned to manage the shift due to stronger capital buffers and advanced risk models, while public sector banks may face additional provisioning requirements [10]. Long-term Benefits - The ECL framework is expected to enhance earnings stability, transparency, and comparability, thereby strengthening the resilience of the banking system [11].