The Reserve Bank of India on Wednesday constituted an external working group on expected credit loss (ECL) based framework for provisioning by banks.
This move comes after RBI released a discussion paper in January this year on shifting from the incurred-loss approach to the ECL model, a transition aimed at making the banking system more resilient.
The ECL model proposed by the regulator, where banks have to recognize stress much earlier, is in contrast to the existing regime where banks make provisions after incurring losses.
The working group chaired by R. Narayanaswamy, former professor of IIM Bangalore, will have domain experts from academia and industry as also representatives from select banks, according to RBI’s press release on Wednesday.
The group’s terms of reference will include laying down the principles for banks while designing the credit risk models to be used for assessing and measuring expected credit losses. It will also recommend factors that banks should consider for determination of credit risk based on the guidance provided in IFRS 9 and principles laid out by BCBS.
RBI will include recommendations of the working group while framing the draft guidelines, which will be put in the public domain for comments before issue of final guidelines, it said.
“Several comments have been received from various stakeholders on the issues flagged in the Discussion Paper, which are being examined by the Reserve Bank. While the regulatory stance to be taken in respect of each of the issues shall be examined by the Reserve Bank, it has been decided to constitute a Working Group in order to get independent inputs on some of the technical aspects having a bearing on the significant transition involved,” said RBI in its press release.
Analysts’ estimates peg the impact of ECL on the core capital of banks at 200 basis points (bps). The current core capital —common equity tier 1 capital —of 46 banks stood at 13.7% on 31 March, as per data from RBI.
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