SBI chair sees limited impact from RBI’s new ECL norms, cites long transition period

"We are technologically ready for ECL guidelines in terms of models and all, but just some adjustments are required based on the final guidelines," C.S. Setty, chairman at India’s largest bank by assets, told reporters on the sidelines of Global Fintech Fest in Mumbai on Wednesday. “More importantly, the long transition time that is given, we believe that there will be limited impact on the bank’s balance sheet."

The Reserve Bank of India (RBI) on Wednesday floated the draft circular, which lays out a transition from the current “incurred loss" provisioning rule to an ECL framework for scheduled commercial banks, alongside revisions in credit-risk classification and risk weights.

The proposals are intended to strengthen banks' forward-looking provisioning practices and align India’s norms with global standards. To ease banks' transition, RBI has proposed a five-year glide path from 1 April 2027, when the new guidelines will kick in, to 31 March 2031. The central bank has invited comments and feedback from stakeholders on the circular by 30 November.

Three-stage classification

Under the draft guidelines, financial assets will be classified in three stages (stage 1, 2, 3) depending on whether a significant increase in credit risk has occurred since initial recognition.

To prevent under-provisioning, stage 1, considered low risk, will require provisioning against 12-month expected credit loss, with a minimum 0.40% provisioning rate for most standard loans; 0.25% for farm or micro, small, and medium enterprises loans; and 1.0-1.25% for unsecured retail and project financing during the under-construction phase.

Under Stage 2, categorised as rising risk, banks will have to set aside funds for lifetime ECL, with a minimum 5% rate for the most-deteriorated loans; 1.5% for secured retail such as home and gold loans; and 0.75-1.0% for operational project loans.

For Stage 3, the credit-impaired category, there will be age-based floors at 25-40% in the first year for secured or unsecured loans; up to 75-100% beyond 3-4 years; and unsecured retail must be fully provided for at 100% after the first year.

The draft also contemplated including credit card users who repay on time–the so-called 'transactors'–under a regulatory retail bucket that would help reduce capital requirement.

However, the proposed norms do not change the classification to declare non-performing loans. Banks must use standard risk functions such as probability of default (PD), loss given default (LGD), and exposure at default (EAD) in building their ECL models, according to the RBI proposal.

Banks’ unsecured retail exposure to personal loans, credit cards and microfinance may have to bear a larger provisioning burden under the ECL frame. Meanwhile, housing or gold loans may see a lower incremental impact.

The RBI estimates that while there will be a one-time provisioning hit, the overall impact on minimum regulatory capital will be modest, thanks to the transition path and existing capital buffers.

"Banks may see a temporary RoA (return on equities) drag due to higher credit costs, though the phased rollout by FY32 will cushion the initial hit," Motilal Oswal Financial Services said in a note.

Private banks, supported by stronger capital buffers, advanced data systems, and mature risk models, are better positioned to manage the shift, while their public sector peers with negligible contingency buffers and higher exposure to MSMEs could face some additional provisioning requirements, it said. “Over time, the ECL framework will enhance earnings stability, transparency, and comparability, strengthening the system’s resilience."

Motilal Oswal’s favourite banking picks are ICICI Bank, HDFC Bank, SBI and AU Small Finance Bank Ltd.

According to ICICI Securities, HDFC Bank Ltd, Axis Bank Ltd, SBI and Kotak Mahindra Bank Ltd, lenders with healthy contingent buffers, should see a smooth transition to ECL.