New Delhi: The finance ministry has asked public sector banks (PSBs) to build additional provisioning buffers against emerging stress in retail, MSME and agriculture loans, as rising early-warning accounts and uncertainty stemming from the West Asia conflict could trigger higher provisioning burdens under the proposed expected credit loss (ECL) regime, according to three people familiar with the matter.
The directive was conveyed by the department of financial services (DFS) to the chiefs of 12 PSBs in a review meeting last week, the people cited above said on condition of anonymity, as the ministry sought to strengthen monitoring and recovery efforts at PSBs to prevent these accounts from slipping into non-performing assets (NPAs).
“The provisions will help PSBs in order to be extra ready for any kind of situation further, although PSBs are giving profits and are in good positions,” one of the three people, a government official, said.
The directive marks the most significant effort since the covid-19 pandemic to strengthen banks’ precautionary buffers, when lenders were encouraged to keep a close watch on restructured loans and other vulnerable segments amid concerns over a potential surge in bad loans. In FY23, retail special mention accounts or SMAs—loans showing early signs of repayment stress—ratio in PSBs was 9.4% of gross advances, according to the RBI's Financial Stability Report.
At the end of FY26, the average SMA ratio across the 12 PSBs stood at 3.19% of gross advances, with stress most pronounced in retail loans (6.17%), followed by MSMEs (5.01%) and agriculture (3.86%). Overall, state-run banks reported nearly ₹4.03 trillion worth of SMAs, according to internal benchmarking data reviewed by Mint.
Strengthen balance sheets
The officials cited above said the finance ministry wants banks to strengthen the PSBs’ balance sheets ahead of the proposed rollout of the Reserve Bank of India’s Expected Credit Loss (ECL) framework aligned with global IFRS-9 standards, likely from FY28.
Unlike the current incurred-loss approach, the ECL regime will require lenders to make provisions based on expected future losses, including for Stage-2 assets or SMA-2 accounts — which are stressed but have not yet turned non-performing — significantly increasing credit costs and pressuring profitability and capital buffers.
SMAs are loan accounts showing early signs of stress. Under RBI norms, they are classified as SMA-0 (showing initial stress), SMA-1 (loans overdue for 31-60 days), and SMA-2 (61-90 days), with accounts overdue for more than 90 days classified as NPAs.
Queries emailed to the spokespersons of the finance ministry, the DFS, the Reserve Bank of India, the Indian Banks’ Association, and the 12 PSBs remained unanswered till press time.
“As per the current method followed by NBFCs, banks are likely to be required to provide significantly more for SMA-1 and 2 assets. Opening stock of Stage 2 as on 1 April 2027 may be provided directly from the balance sheet as deduction from net worth. Incremental additions to Stage 2 will have to be provided from profitability,” said Sanjay Agarwal, senior director at CareEdge Ratings, a rating agency.
Meanwhile, the government said on Monday that Emergency Credit Line Guarantee scheme (ECLGS) 5.0 has received about 263,000 loan applications worth ₹1.71 trillion as of 29 May.
Additional credit flow
In the interministerial briefing on West Asia, Manoj Ayyappan, joint secretary in the DFS, said that 79,950 of these applications involving ₹35,194 crore have been sanctioned, while guarantees worth ₹15,720 crore have been issued.
The scheme provides for an additional credit flow of ₹2.55 trillion, including ₹5,000 crore earmarked for the aviation sector.
Launched during the covid-19 pandemic, ECLGS provides government-backed credit support to stressed borrowers. The latest version, ECLGS 5.0, approved in May, offers 100% guarantee cover for MSMEs and 90% for non-MSMEs and airlines affected by the West Asia crisis through the National Credit Guarantee Trustee Company Ltd. (NCGTC), with additional credit support of up to 20% of peak FY26 working capital usage, subject to a ₹100-crore cap.
On 6 May, the government said that airlines have been facing financial pressure due to a sharp rise in aviation turbine fuel (ATF) prices, airspace closures and reduced operations, particularly on international routes, resulting in lower aircraft utilisation and liquidity constraints.
For airlines, the scheme provides a maximum loan limit of ₹1,000 crore per borrower, along with an additional ₹500 crore subject to equivalent equity infusion by the borrower. The loans will carry a tenure of up to seven years, including a two-year moratorium on repayment. For airlines, the additional credit support can be up to 100% of eligible limits, subject to a cap of ₹1,500 crore per borrower and specified conditions.