Reserve Bank of India finalises ECL norms, rollout set for April 2027

RBI introduces expected credit loss framework for banks, to be implemented from April 2027, replacing incurred loss norms and strengthening credit risk provisioning

The Reserve Bank of India (RBI) on Monday issued final guidelines for adopting an expected credit loss (ECL)-based loan loss provisioning framework, marking a significant shift in how banks recognise and provide for credit risk.  

 

The final norms have hardly any changes from the draft norms, released in October last year, as it retained the proposed 5 per cent provision for stage -2 loans even if the banks requested for lower provision.

 

“These directions are intended to further strengthen credit risk management practices, improve comparability across regulated entities, and align the regulatory framework more closely with internationally accepted financial reporting principles”, RBI said. 

 

According to the norms banks shall ensure that while granting credit facilities, realistic repayment schedules are fixed on the basis of borrower’s cash flows. “This would go a long way in facilitating prompt repayment and improving the record of recovery,” it said.

 

Banks can spread increase in provision requirement arising due to transition to the ECL framework over four years, ending on 31 March 2031. The norms mandated that the transition impact, if any, shall be adjusted against opening earnings as on April 1, 2027 and shall not be routed through profit & loss account. Banks are allowed to add back to Common Equity Tier 1 (CET1) capital net of applicable taxes, during the transition period ending March 31, 2031.

 

It has been mandated that on the date of transition to the ECL framework, i.e., April 1, 2027, banks shall fair value their entire loan portfolio, including all outstanding advances. Banks have asked to adjust difference between the fair value of financial assets and their carrying amount immediately preceding the date of transition against the opening balance of retained earnings, and not through P&L account.

 

Further, for loans originated on or after April 1, 2027, a bank shall measure a financial asset, including a loan, at fair value plus or minus transaction costs that are directly attributable to the acquisition or origination of the financial asset. “After initial recognition, a bank shall measure financial assets at amortised cost using the effective interest rate (EIR) method,” the norms said.

 

All loans outstanding as on March 31, 2027 shall be brought under the EIR regime no later than March 31, 2030.

 

The framework is aimed at strengthening resilience, enhancing transparency, and aligning Indian banking regulation with globally accepted accounting standards. 

 

There is a three-stage classification system based on deterioration in credit risk since origination under ECL. Standard assets with no significant increase in risk will attract 12-month expected loss provisioning (Stage 1), while loans showing heightened risk will require lifetime loss provisioning (Stage 2). Credit-impaired assets will fall under Stage 3, also attracting lifetime expected losses. 

 

“Currently, on both Stage 1 and Stage 2 loans, which are standard asset loans, banks provide around 40bps largely. Now under the new ECL norms, the stage 2 loans, which will be largely 60-90 day overdue loans, will attract minimum 500bps, which is clearly negative,” said Suresh Ganapathy, managing director, and head, Financial Services Research, Macquire Research.

 

Banks must also need to ensure consistency in identifying significant increases in credit risk (SICR), including clear internal thresholds for rating downgrades, pricing changes, and macroeconomic deterioration. 

 

ECL computation will be based on three key parameters — probability of default (PD), loss given default (LGD), and exposure at default (EAD) — with banks required to adopt probability-weighted estimates across multiple macroeconomic scenarios. 

 

Meanwhile, the RBI has retained the existing 90-day delinquency norm for classification of non-performing assets (NPAs), ensuring continuity in the identification of stressed assets even as provisioning norms undergo a structural shift. 

 

The RBI emphasised robust governance, requiring boards and senior management to oversee ECL implementation. Dedicated frameworks for model validation, data integrity, and internal controls will be critical, supported by a three-tier model risk management structure spanning business, risk, and audit functions. 

 

A committee of the Board, or a Board-approved committee, including the Chief Financial Officer (CFO) and Chief Risk officer (CRO), shall oversee robust implementation of the ECL framework, the norms mandated.

 

The committee should ensure data integrity throughout the entire lifecycle of ECL computation, effective and robust governance and control frameworks over ECL estimation, and complete independence of internal model validation function and suitability of the coverage, among others.

 

To guard against under-provisioning, the RBI introduced product-wise prudential floors across asset classes, including retail, corporate, MSME, agriculture, and real estate exposures. These minimum provisioning levels will act as a regulatory backstop, irrespective of model-driven outcomes. 

 

For instance, standard corporate and retail loans will attract a minimum Stage 1 provision of 0.40 per cent, rising to 5 per cent in Stage 2, with significantly higher provisioning mandated for Stage 3 assets depending on the duration of default. 

 

The RBI also stressed the need for accurate and timely identification of overdue accounts through technology-enabled systems, with asset classification determined on a day-end basis. 

 

Further, loan contracts will need to explicitly specify repayment schedules, due dates, and implications of SMA/NPA classification, enhancing transparency for borrowers. 

 

The norms said that the banks need to maintain sufficient historical loss data, covering an adequately representative period, to provide a meaningful basis for analysis of its credit loss experience for use as a starting point in estimating the level of loss allowances on an individual or collective basis. “In determining the period of such data, the bank shall take into account the nature of the portfolio, data availability, and the need to capture variations across business cycles and associated outliers,” it said.

 

“The transitional arrangements to spread the capital impact over multiple years does help, but most banks will have to work tirelessly to develop the databases, models and upgraded systems required for this transition”, said Jatin Kalra, Partner, Grant Thornton Bharat.  

New normal

 

• ECL framework replaces incurred-loss model with forward-looking approach to recognise credit risk earlier
• 3-stage structure introduced 
• Stage 1: 12-month expected loss; Stage 2: Lifetime expected loss; and Stage 3: Lifetime expected loss
• Banks to fair value loan books on transition; impact to be adjusted via retained earnings, not P&L
• Minimum provisioning: 0.4% (Stage 1) and 5% (Stage 2) for standard corporate and retail loans