Banking stocks to buy: The Reserve Bank of India’s proposed Expected Credit Loss (ECL) framework could mark one of the biggest structural shifts for the country’s banking sector in recent years, with experts believing the move may separate stronger lenders from weaker ones over time. The framework, scheduled to be implemented from April 2027, will require banks to recognise potential loan losses much earlier instead of waiting for accounts to turn bad.
Analysts believe the transition may initially create pressure on profitability and provisioning for some lenders, particularly PSU banks, but could strengthen transparency, balance sheet quality, and investor confidence in the long run.
“The RBI’s new ECL framework is likely to bring major changes to the Indian banking sector and could reshape stock market performance over the next few years,” said Abhinav Tiwari, Research Analyst at Bonanza.
Why the RBI’s ECL framework is a major shift
The RBI’s latest move changes the way banks account for stress in their loan books. Instead of waiting for borrowers to default before recognising losses, banks will now have to estimate possible future risks in advance. Experts believe this forward-looking approach may improve financial discipline and bring Indian banking practices closer to global standards, though the transition could create temporary earnings pressure for lenders that maintain weaker provisioning buffers.
Tiwari explained that the new rules shift banks away from the traditional “wait for default” approach towards a forward-looking system where lenders will have to estimate future loan losses in advance. According to Tiwari, loans will now be classified into three stages depending on risk levels, with banks required to use historical defaults, recovery trends and macroeconomic indicators while calculating expected losses. He added that the existing 90-day NPA recognition norm would continue unchanged.
According to Tiwari, the overall impact on the banking sector could remain manageable because the RBI has provided banks a long transition timeline extending till FY2031 to absorb the capital impact gradually. He noted that sector-wide CET-1 impact estimates currently remain below 150 basis points.
“In the near term, PSU banks may face more pressure than private banks,” said Tiwari.
Tiwari pointed out that PSU banking stocks had already witnessed sharp corrections after the announcement because many state-run lenders currently maintain lower contingency buffers compared to private peers. He said loans overdue between 30 and 90 days would now attract substantially higher provisioning requirements, which could temporarily hurt profitability and dividend payouts for PSU banks.
Which stocks could emerge stronger
While the framework may initially create volatility in banking stocks, experts believe stronger lenders and technology-driven financial firms could emerge as long-term beneficiaries. Banks with cleaner balance sheets, disciplined underwriting standards and stronger analytics systems are expected to attract higher investor confidence.
“The Indian financial system is moving towards stronger discipline, global-standard risk management, and long-term stability rather than short-term profitability optics,” said Ponmudi R, CEO of Enrich Money.
According to Ponmudi R, the market may initially remain cautious because higher provisioning requirements could weigh on quarterly earnings, especially for PSU banks and lenders with weaker loan books. He added that investors may interpret the immediate impact as pressure on margins and return ratios.
However, Ponmudi R believes the longer-term implications remain favourable for stronger lenders. He noted that banks with superior underwriting standards, stronger CASA franchises, disciplined lending practices and advanced analytics capabilities were likely to command higher investor confidence under the new system. He further said the framework could help reduce future financial shocks because hidden stress would get identified much earlier rather than surfacing suddenly during economic downturns.
Ponmudi R also suggested that the shift may improve the valuation premium of Indian banking stocks globally as domestic banking standards move closer to international accounting and risk management practices. He added that NBFCs with stronger governance standards and disciplined lending models could also gain investor trust, while weaker players may face increasing scrutiny.
Moreover, Tiwari added that large private sector lenders such as HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank appeared better positioned due to stronger provisioning buffers and more conservative risk management practices.
Tiwari also highlighted that the changes may create opportunities beyond the banking space. According to him, rating agencies, credit bureaus and technology firms involved in analytics and risk management could benefit from rising demand for predictive models and credit assessment tools.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
