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]