Analysts say top pvt banks, PSBs well positioned for ECL norm transition

Analysts say large lenders like HDFC Bank, ICICI Bank and SBI have strong provisioning buffers, while those with unsecured or microfinance exposure may face higher impact

Large private sector banks like HDFC, ICICI and Axis, and public sector banks are well positioned to absorb the additional provisioning requirement while transitioning to the expected credit loss (ECL) framework, analysts said.

 

On Wednesday, the Reserve Bank of India published draft norms of the ECL framework which is proposed to come into effect from April 1, 2027.

 

According to analysts, banks with higher exposure to unsecured and micro finance loans will have a higher provisioning burden.

 

 “Under the new ECL regime, the top private banks, such as HDFC, ICICI and Axis, are well positioned as their strong underwriting, secured retail-heavy portfolios, and high contingent provisions position them for a smooth transition with minimal capital or P&L impact,” Motilal Oswal said in a report.

 

The transition to expected loss framework from the current incurred loss framework will start from April 1, 2027. Banks will get four years to spread the provision of their existing book.

 

“Considering there is plenty of time being given, we expect transition even for PSU banks to be smooth, but there is bound to be some earnings impact that could be higher than private sector banks from FY28,” Macquarie Research said in a note.

 

The draft framework has introduced a forward-looking ECL model with a three-stage classification to determine if there is any significant increase in credit risk (SICR).  ‘30 DPD’ (days past due) has been considered as SICR.

 

A financial instrument is said to be under stage 1, when it has not had a SICR since initial recognition or has low credit risk and for these instruments, 12-month ECL shall be recognised. Stage 2 is when it has had a SICR since initial recognition, but is not considered to be “credit impaired”. For such financial instruments, lifetime ECL shall be recognised. A financial instrument is said to be under Stage 3, when it is considered to be “credit impaired” at the reporting date. For such instruments, lifetime ECL shall be recognised. 

 

Banks have been asked to develop internal models incorporating macro-economic forecasts and maintaining rigorous model governance with independent validation and board oversight.

 

“We note systemic PCR (provision coverage ratio), at >75 per cent, is healthy, though select banks may need to push PCR further. Banks such as HDFC, Axis, SBI and KVB have healthy contingent buffers and, thus, should see a smooth transition to ECL,” ICICI Securities said in a note.

 

According to the Motilal Oswal report, impact on the public sector banks is expected to be limited due to their strong asset quality performance in the last few years, along with robust PCR, and low restructured exposure. Public sector banks have seen a decline in their gross non-performing assets after following its peak in 2018.

 

“Banks with elevated unsecured or MFI exposure and those having higher SMA accounts could see higher provisioning requirements,” the report said.

 

On Wednesday, the banking regulator also released draft norms on capital charges for credit risk under the standardised approach for corporates, MSMEs, and real estate loans. Under the new guidelines adopting the standardised approach, the RBI has introduced granular risk weights (RW), differentiated by credit rating, and quality due diligence for exposures to corporates, MSMEs, real estate and even few of the retail categories (mainly credit card). 

On credit cards, transactors, that is, a consumer who pays their credit card statement balance in full and on time every month for one year, will attract a lower risk weight of 75 per cent as compared to 150 per cent earlier.

 

Nomura said the rationalisation of risk weights are positive for banks and estimated improvement in the common equity tier-I (CET1) capital by 60 to 120 bps.

 

“We believe that the reduced risk weights under the new standardised approach for credit risk should ease capital burn for banks and thus will be credit positive in the long term, particularly in sectors like MSMEs and retail (mainly housing and cards),” Emkay Research said, adding the new norms will benefit HDFC Bank, ICICI Bank and SBI Card. 

Smooth switch

• Strong underwriting, secured retail-heavy portfolios, positioned private banks and PSBs for a smooth transition
• Analysts said banks with higher exposure to unsecured and micro-finance loans will have a higher provisioning burden
• Lenders will get four years to spread the provision of their existing book
• Motilal Oswal said impact on PSBs may be limited due to their strong asset quality performance in past few years