The Reserve Bank of India (RBI) has issued final guidelines on the Expected Credit Loss (ECL)-based provisioning and credit risk framework for commercial banks, marking a significant shift in how lenders assess and provide for credit risk. The new norms will come into effect from April 1, 2027.
Under the ECL framework, banks will transition from the traditional “incurred loss” approach to a forward-looking, risk-based provisioning model. Loans will be classified into three stages based on credit risk: Stage 1 (low risk), Stage 2 (significant increase in credit risk or SICR), and Stage 3 (credit impaired). This replaces the existing overdue ageing-based classification system.
The framework aligns Indian banking regulations more closely with Indian Accounting Standards (Ind AS) and requires banks to estimate credit losses using key parameters such as probability of default (PD), loss given default (LGD), and exposure at default (EAD). Analysts say this approach enables earlier recognition of stress, improving risk visibility and allowing proactive portfolio management.
Higher provisioning requirements
The RBI has prescribed prudential floor levels for provisioning across asset classes:
> Stage 1 (0–30 days past due): Provisioning remains broadly in line with current norms for standard assets, with some increases. Unsecured retail loans will attract a 1% provision (up from 0.4%), while commercial real estate (CRE) exposures under construction will require 1.25% (versus 1% currently).
> Stage 2 (31–90 days past due): Provisioning requirements rise sharply to 5% for most loan categories, compared with about 0.4% under existing norms.
> Stage 3 (90+ days past due): Provisioning will increase further, broadly aligned with the current time-in-default framework.
A key change is the inclusion of loans overdue by 31–90 days in Stage 2, bringing banks in line with the approach already followed by non-banking financial companies (NBFCs).
Transition relief to ease impact
To cushion the transition, the RBI has allowed banks to amortise the incremental provisioning requirement over a four-year period from FY28 to FY31. The transitional adjustment — defined as the difference between required ECL provisions as of April 1, 2027 and provisions held as of March 31, 2027 — can be phased into Common Equity Tier-1 (CET-1) capital during this period.
While the prescribed provisioning floors are modestly higher than current norms, analysts expect an overall increase in credit costs. However, improved asset quality in recent years is likely to moderate the impact compared with what it would have been in a weaker credit cycle, according to ICRA.
Impact on banks
ICRA estimates that the transition to ECL norms could reduce banks’ core capital ratios by less than 150 basis points at the outset. However, the impact will vary significantly across institutions.
Banks with thinner capital buffers, higher overdue portfolios, significant sanctioned but undisbursed exposures, and large non-fund-based commitments are expected to face greater pressure. These lenders may need to raise capital or rely on the transition window to absorb the impact.
ICRA cautioned that banks opting for regulatory forbearance may not be viewed favourably by investors, potentially complicating future capital-raising efforts.
According to Nomura, the shift to ECL provisioning will lead to higher upfront provisions, particularly in unsecured retail, MSME, and corporate loan segments. The brokerage expects public sector banks (PSBs) and mid-sized lenders to bear the brunt of the transition.
Several PSBs have indicated that the one-time provisioning hit could reduce net worth by 3–9%. In contrast, large private sector banks appear better positioned due to stronger provision buffers, estimated at 2–4% of net worth.
Nomura also highlighted that the revised risk-weight framework under the guidelines could be capital-positive for the sector overall, potentially boosting CET-1 ratios of large banks by 60–120 basis points.
Echoing this view, ICICI Securities noted that large private banks are well placed to absorb the transition, supported by robust balance sheets. As of Q3FY26, Kotak Mahindra Bank estimated an ECL impact of around 2% of net worth, while IndusInd Bank had guided for a transitional impact of 1.5–1.7% of loans (7–8% of net worth), which may now moderate under the final guidelines.
Among PSBs, estimated impacts vary. Some lenders have guided for ECL-related provisioning of less than 1% of loans (around 4–8% of net worth), while others have indicated a wider range of 1–2% of loans (6–11% of net worth). Banks with higher slippages, elevated SMA accounts, and lower provision coverage ratios (PCR) are expected to be more sensitive to the new norms.
Notably, the introduction of a differentiated Stage 2 provisioning floor for home loans offers some relief to banks with significant housing loan exposure.
Bank-specific estimates
Disclosures by banks as of Q3FY26 indicate varying degrees of impact:
> IndusInd Bank: 1.5–1.7% of advances (~7–8% of net worth)
> RBL Bank: ~10% of net worth
> Kotak Mahindra Bank: <2% of net worth
> Bank of Baroda: ~4–4.5% of net worth
> Bank of India: up to ~11% of net worth
> Canara Bank: ~9% of net worth
> Punjab National Bank: ~6–7% of net worth
> Union Bank of India: ~3.3–3.4% of net worth
Some banks, such as Indian Bank, have indicated a preference to absorb the impact upfront rather than spreading it over the transition period, ICICI Securities noted.
NBFCs better positioned
Non-banking financial companies (NBFC) are expected to be relatively insulated from the transition. According to Kotak Institutional Equities, NBFCs have already been operating under an ECL-based framework for several years.
Although provisioning coverage for NBFCs has evolved over time in response to credit cycles and model adjustments, the RBI has not prescribed minimum provisioning floors for them under the ECL regime. Based on current assumptions, most NBFCs appear well positioned to meet similar requirements, should they be introduced.
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