RBI likely to draw up road map for ECL adoption at Monday's meeting

The Reserve Bank of India (RBI) is expected to drop broad hints for the adoption of the expected credit loss (ECL) framework at Monday’s meeting with the boards of private banks in Mumbai.

 

The central bank’s communication to private banks’ board secretariats has not listed the agenda for the meeting, but has only given the event flow. This includes an address by RBI Governor Shaktikanta Das, presentations by the central bank’s chief general managers, and an open house with executive directors.

 

A meeting between RBI and the boards of state-run banks was also expected, but the scheduling is not out as yet.

 

According to senior bankers, the other major talking points that are likely to be discussed at the meeting are the proposed changes to the liquidity coverage ratio framework, business models – with reference to unsecured credit, and stress in the micro finance portfolios, cyber security, IT resilience and customer protection.

 

It is speculated that the impact of climate change on the books of banks will also figure in the backdrop of the United Nations Climate Change Conference (COP29) in Baku, and India’s position that developed countries need to commit to provide and mobilise at least $1.3 trillion every year till 2030. The RBI’s final guidelines for 'Disclosure framework on climate-related financial risks’ is to be issued shortly.

 

On ECL, at present, banks are required to make loan-loss provisions based on an “incurred loss” approach (this used to be the standard globally till recently). Under this approach, banks provide for losses that have occurred or incurred. But this is not proactive as default is a lagging indicator of credit risk.

 

Since classification of an exposure as a non-performing asset (NPA) takes place after a borrower is overdue for more than 90 days, loan-loss provisions are made with significant delays. Under ECL, banks have to recognise the increase in the credit risk and start making provisions for the losses expected much before the default happens, let alone the subsequent classification of the exposure as a NPA. Such provisioning will cover the non-funded book upfront too unlike presently when provisions happen only when those contingent liabilities are crystallised.

 

While most banks do have a shadow ECL book, timelines for its formal adoption are not yet in place. Incidentally, non-banking financial companies are already in ECL mode. A senior banker opined that timelines for adoption of the Indian Accounting Standards (IndAS) (of which ECL is a part) by banks would need an amendment to the Banking Regulation Act (BR Act, 1949). Therefore, the RBI is bringing in elements of IndAS gradually into the accounting framework of the banks.

 

Follow through on the ten points articulated by Das at last year’s conference (the first of its kind) is taken for granted. These include governance and stability, requisite qualifications and expertise in the board, objective and independent board, role of chairperson, board committees, and top executives. Other aspects were corporate culture and value systems, quality of information, effective oversight of senior management, business model and conduct, integrity and transparency of financial statements, and independence of assurance functions: risk management, compliance, and internal audit.

 

Ahead of last year’s meeting, the RBI’s interaction with the boards of state-run and private banks was seen as a first step following Finance Minister Nirmala Sitharaman’s Union Budget FY24 announcement on the need to improve governance and investor-depositor protection in the banking sector. In the FY24 Budget, Sitharaman had proposed certain amendments to the RBI Act (1934), the BR Act (1949), and the Banking Companies (Acquisition and Transfer of Undertakings) Act (1970).