RBI rejects banks' demand for more time to adopt expected credit loss model

Mumbai: The Reserve Bank of India (RBI) on Monday said it has rejected lenders' demand for more time to transition to the expected credit loss (ECL) framework mandate. With the deadline being 1 April 2027, the regulator said banks have a year to prepare for the new framework that aims for early identification and provision for potential loan losses.

Banks had sought more time to enable them to build databases and models, and upgrade their systems for the new framework.

“In addition, to ease the transition to the new framework, a calibrated transition framework has been provided, including transitional arrangement for one-time capital impact on account of ECL transition, three-year timeline for application of effective interest rate on legacy loan accounts and guidance provided on key implementation issues,” RBI said on Monday.

The reference was to an October 2025 draft circular, which laid down a transition plan 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 key difference between the incurred credit loss and expected credit loss is that while the incurred model is reactive and recognizes such losses when it happens, the new model is proactive and forward-looking.

Under the new guidelines, financial assets will be classified in three stages, depending on whether there has been a significant rise in credit risk since initial recognition.

The proposals aim to strengthen banks' forward-looking provisioning practices and align India’s norms with global standards. RBI has proposed a glide path from 1 April 2027, when the new guidelines will kick in, to 31 March 2031.

RBI has proposed a glide path from 1 April 2027—when the new guidelines will kick in—to 31 March 2031.

In October, RBI had also said there may be various approaches to calculate the expected credit loss. It had said a bank will have to use a general approach with three key functions: probability of default (PD), loss given default (LGD) and exposure at default (EAD) while following the guidelines.

In its statement on Monday, RBI said banks had sought a detailed guidance on how to implement the framework but their demand had been rejected. The ECL framework is principle-based and requires institution-specific risk assessment, it explained.

“Banks differ materially in terms of portfolio composition, business models, customer segments, data availability, etc., and therefore, a uniform and highly granular implementation framework will not be appropriate across all banks,” RBI said.

Analysts had earlier said banks may see a temporary drag on their return on equities due to the higher credit costs.

In October, a note by Motilal Oswal Financial Services said 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.

Suresh Ganapathy, managing director at Macquarie Capital Securities said currently, on both stage-1 and -2 loans, which are standard asset loans, banks typically keep around 40 basis points (bps) in provisions.

“Now under the new ECL norms, the stage-2 loans, which will be largely 60-90 day overdue loans, will attract minimum 500 bps, which is clearly negative,” Ganapathy said in a note on Monday.