The Reserve Bank of India could consider approving bankers’ request to lower the provisioning requirement on stage-2 loans to 1-3 per cent from proposed 5 per cent under the draft expected credit loss (ECL) guidelines, sources say.Bankers, in their representation to the RBI, have requested to reconsider proposal of making 5 per cent provision for stage-2 assets as they currently make only 0.4 per cent provision for most standard and stressed assets (refer to table for details on provisioning floors). They ...

Core Insights - The Reserve Bank of India's draft guidelines on the Expected Credit Loss (ECL) framework and revised credit risk capital norms represent a significant evolution in India's banking regulation, aiming to align with global best practices in credit risk modeling and provisioning discipline [1][12] - All scheduled commercial banks will transition to a model-based provisioning system starting April 2027, with a phased implementation through FY2032 [1][12] - The new framework introduces a three-stage classification of assets—performing, underperforming, and credit-impaired—along with model-driven provisioning based on probability of default (PD), loss given default (LGD), and exposure at default (EAD) [2][12] Banking Sector Implications - Regulatory floors for provisioning, such as 0.25–1.25% for Stage 1 and 25–100% for Stage 3 assets, are designed to prevent under-provisioning and ensure consistency across lenders [2][12] - Stronger private lenders, equipped with robust data infrastructure and capital buffers, are better positioned for the transition, while public sector banks have improved balance sheets and provision coverage compared to previous credit cycles [5][12] - The RBI's overhaul of risk weights for various exposures will reshape capital allocation, with lower risk weights for affordable housing (20–40%) and rated MSMEs (down to 85%) to enhance credit flow to priority segments [6][12] Future Outlook - The combination of ECL-based provisioning and risk-sensitive capital norms is expected to enhance the stability and credit discipline of the banking system, fostering greater investor confidence and a more resilient financial sector [7][12] - HDFC Bank is anticipated to experience a healthy growth recovery post FY25, driven by corporate lending and retail portfolio expansion, despite near-term pressure on net interest margins (NIMs) [8][9][12] - State Bank of India (SBI) shows diversified growth across retail, SME, and corporate segments, with improved asset quality (GNPA at 1.8% and provision coverage at 79%), positioning it well for the ECL transition [10][11][12]

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].

Core Insights - The State Bank of India (SBI) is experiencing significant rate transmission in the banking system, with over 106 basis points on fresh deposits and about 22 basis points on overall deposits since February [1][10] - SBI anticipates a terminal repo rate of 5.25%, with a potential rate cut expected in December, as growth and inflation remain stable [10] - The traditional busy season is starting earlier this year, driven by recent GST rate cuts, leading to uniform traction across segments [2][10] - SBI is well-prepared for the RBI's Expected Credit Loss (ECL) framework implementation, having already factored its impact on growth and asset book [3][4][10] - The RBI's move to finance acquisitions is expected to enhance credit flows, addressing demand challenges as corporates hold significant cash [6][10] - The proposed risk-based deposit insurance premiums by the RBI are seen as beneficial for large banks like SBI, promoting sound risk management [8][10] - The current policy pause by the RBI is viewed positively, setting the stage for stronger business momentum for SBI ahead of the December review [9][10]

Core Insights - The Indian banking system is well-capitalized and prepared for the transition to Basel III norms, which will be effective from April 1, 2027, enhancing banks' ability to raise foreign capital and strengthening their overall capital base [5][8][6] - The Reserve Bank of India (RBI) has adopted a neutral stance in its latest policy, indicating a wait-and-watch approach regarding credit growth, which will depend on tariff-related challenges in the real economy [2][8] - The coverage ratios of banks are at healthy levels, providing adequate buffers against potential credit risks, which is crucial for the stability of the banking sector [1][8] Liquidity and Monetary Transmission - Approximately 58 basis points (bps) of monetary transmission on new loans has occurred, with 21 bps achieved in recent months, while deposit rates have increased by 106 bps, indicating a gradual alignment of lending and deposit rates [1][8] - The relaxation in the Cash Reserve Ratio (CRR) is expected to release about Rs 2.5 trillion in liquidity, supporting credit growth and improving corporate credit demand during the busy season [8][2] Basel III Implementation - The transition to Basel III is viewed positively, as it is expected to boost investor confidence and align India's banking sector more closely with global regulatory standards [6][7] - The additional preparation time until 2027 will strengthen the banking system, allowing for a smoother adoption of Basel III guidelines without significant disruption [8][5] Overall Banking System Health - The Indian banking system has undergone significant clean-up in recent years, resulting in improved asset quality, healthy capital ratios, and robust profitability [7][8] - Experts believe that the Expected Credit Loss (ECL) framework and Basel III adoption will signify a new phase of resilience and global integration for Indian banks [7][8]