RBI forms external working group on expected credit loss framework

The Reserve Bank of India (RBI) announced on Wednesday the establishment of an external working group (WG) on the expected credit loss (ECL) framework for loan loss provisioning. This group aims to obtain independent insights on the intricate details related to the substantial shift involved.

The WG will operate under the leadership of R. Narayanaswamy, former Professor at IIM Bangalore. The group is comprised of eight experts, with representatives from six banks and one representative each from KPMG and the Indian School of Business, Hyderabad.

The group's mandate includes outlining the principles banks must follow when creating credit risk models for evaluating and quantifying expected credit losses. Additionally, they are tasked with proposing the elements banks need to address when determining credit risks, drawing from guidelines in IFRS 9 and principles established by the Basel Committee on Banking Supervision.

Furthermore, the panel will advise on the methodology for independent external validation of these models and, based on thorough data analysis, will propose prudential floors for provisioning.

RBI highlighted that the recommendations of the WG will be considered when drafting guidelines. These draft guidelines will be made publicly available for feedback before their finalisation.

Earlier in January, RBI introduced a discussion paper addressing the expected credit loss approach for loan loss provisioning among banks.

RBI noted, “Various stakeholders have provided feedback on the issues raised in the Discussion Paper, which are currently under RBI's review.”

The shift to the ECL framework from the existing incurred loss provisioning system hasn't been scheduled yet. The RBI assured that banks would receive ample time to adapt to the ECL framework after the final guidelines are issued.

The discussion paper mentioned that banks would have the flexibility to phase out the effect of increased provisions on Common Equity Tier I capital over a span of up to five years.

The external working group which is chaired by R. Narayanaswamy, former Professor, IIM Bangalore, will have eight other members.

Sanjay Kallapur, ISB, Hyderabad

Rajosik Banerjee, KPMG

S Srinivasa Rao, SBI

Rajendra Khandelwal, ICICI Bank

Susanta Baishya, HDFC Bank

Adish Yadav, Canara Bank

Pravinkumar Taparia, Saraswat Co-operative Bank

Sridharan N, Equitas Small Finance Bank