ECL transition time will ensure limited impact on banks: SBI chairman

C S Setty says extended transition will cushion banks from ECL shock, stresses need for stronger collections before expanding UPI-based credit products

The glide path starting April 1, 2027, given by the Reserve Bank of India (RBI) to spread higher provisioning requirements while transitioning to the expected credit loss (ECL) framework from the current incurred loss framework will ensure a limited impact on banks’ balance sheets, said C.S. Setty, Chairman of the State Bank of India (SBI). He added that SBI is ready in terms of modelling for implementing ECL but may need to make some tweaks based on the final guidelines issued by the central bank.

 

“We are technologically ready for ECL in terms of models, but some adjustments may be required based on the final guidelines”, Setty said on the sidelines of the Global Fintech Fest. “The long transition time that is given, we believe that there will be limited impact on the balance sheet of banks”, he added.

 

RBI is yet to announce draft ECL norms. A discussion paper was floated in early 2023.

 

Last week, RBI governor Sanjay Malhotra said the ECL framework of provisioning with prudential floors is proposed to be made applicable to all scheduled commercial banks (excluding Small Finance Banks (SFBs), Payment Banks (PBs), Regional Rural Banks(RRBs)) and All India Financial Institutions (AIFIs) with effect from April 1, 2027. They will be given a glide path (till March 31, 2031) to smoothen the one-time impact of higher provisioning, if any, on their existing books, he said.

 

The draft framework introduces a forward-looking ECL model with a three-stage classification: Stage 1 (performing), Stage 2 (significant increase in credit risk (SICR)> 30 DPD or other risk triggers) and Stage 3 (credit-impaired/NPA).

 

To prevent under provisioning, the RBI has proposed regulatory floors, e.g., Stage 1 (0.25-1.25%), Stage 2 (1.5-5 per cent), and Stage 3 (25-100 per cent based on aging and collateral). The norms extend to off-balance-sheet exposures, reinforce cash-basis interest recognition on NPAs, and mandate granular stage-wise disclosures and reconciliations.

 

Additionally, Setty said banks like SBI are well versed in acquisition financing, as they are already financing overseas acquisition of Indian corporates. “We have been doing outbound M&A financing for Indian corporates acquiring overseas entities. I think banks like SBI are well versed in acquisition financing”, Setty said. Last week, the RBI said it will allow banks to finance acquisitions by Indian corporates, which has been a long standing demand of Indian banks. 

 

Separately, Setty highlighted that credit on UPI is a very powerful concept. “There are two ways of looking at credit on UPI. One is the intuitive credit availability to the user of UPI at the point of sale (PoS). We are using extensive data which is available to us and also correlating with UPI data and trying to give a pre-approved line of credit, and maybe we can enhance as we go forward”, he said.

 

Setty also said that SBI is looking to go beyond consumers who are using PoS machines and make this small ticket credit available to the farmers on UPI because there is extensive usage of UPI in the semi urban and rural areas.

 

Having said that, he highlighted the banks need to strengthen their collection mechanism for these small ticket loans. “Delivering this credit is easier on UPI. But, we need to strengthen our collection mechanism, because this credit always has two components: how do you give the money easily, and more importantly how do you collect it back. So we need to get the collection piece right before we roll out as many products on the UPI”, he said.

 

Speaking about YONO, Setty has 90 million registered users on YONO. “Our future plans on YONO is that we want to have diversified languages available on the platform. Almost 15 languages will be available on YONO 2.0. And, we would also focus on how we make more products available for farmers, MSME customers, and also the financial inclusion customers”. When YONO 2.O is launched, SBI aims to have the ability to onboard 200 million customers, and SBI is working with almost a dozen fintechs in developing YONO 2.O.

 

In terms of demographic, one-third of SBI’s customer base is below 35 years of age.

 

“They feel comfortable dealing with SBI because of the trust it provides”, Setty said, adding that most of the young generation comes to SBI because the bank provides the best services. “Our endeavor is to cater to every segment and more importantly. We only look at providing the services just by merely opening an account. I think the constant engagement; customer life cycle management is something that we are looking at”, he said.

 

Setty also highlighted that in any institution, more than 70 per cent of the students who avail education loans are from SBI. He also underscored that SBI is working on simplifying the KYC process. “Even it means we have to engage with the regulators at the government level, we are taking that initiative”, Setty said. 

 

He highlighted that the banks need to strengthen their collection mechanism for these small ticket loans. “Delivering this credit is easier on UPI. But, we need to strengthen our collection mechanism, because this credit always has two components- how do you give the money easily, and more importantly how do you collect it back? So we need to get the collection piece right before we roll out as many products on the UPI,” he said.