RBI may approve 1-3% provisioning floor for stage-2 loans under ECL framework: Sources

Core Viewpoint - The Reserve Bank of India (RBI) may consider reducing the provisioning requirement for stage-2 loans from 5% to a range of 1-3% as per bankers' requests under the draft expected credit loss (ECL) guidelines [1][2]. Group 1: Provisioning Requirements - Bankers have requested the RBI to reconsider the proposed 5% provision for stage-2 assets, as they currently maintain only 0.4% provision for most standard and stressed assets [2]. - Stage-2 advances are defined as loans that are overdue for 61-90 days, and in segments like home or vehicle loans, there is a 50% average recovery rate from overdue and non-performing assets (NPAs) [2]. Group 2: Impact on Capital Ratios - Higher provisions for stage-2 loans could adversely affect the capital ratios of some lenders and hinder growth, as banks cannot recognize NPAs as standard assets even after six months of full payment by the borrower [5]. - The shift to the ECL model from the incurred loss model could have a sub-150 basis points impact on banks' capital ratios, particularly affecting those reliant on riskier segments like unsecured credit cards and micro loans [5]. Group 3: Profitability Concerns - There will be a profitability impact from the implementation of ECL guidelines, despite the provided glide path for implementation [7]. - It is suggested that the RBI should revisit the proposed flooring percentages, especially if systemic risks arise in certain asset categories [7]. Group 4: Current Actions by Banks - Bank of Baroda has made ₹400 crore of floating provisions in Q2FY26 in anticipation of the shift to the ECL model, while larger banks like State Bank of India and HDFC Bank are awaiting final guidelines to create ECL-specific provisions [8].