India cenbank sets up working group to assess new proposal on loan loss provisions

Indian lenders are yet to transition to the ECL method.

India’s central bank on Wednesday formed an external working group to seek independent inputs on how banks could make provisions on bad loans using an expected credit loss (ECL) method.

The Reserve Bank of India (RBI) released a discussion paper in January suggesting banks switch to the ECL method, in which lenders assess the probability of default upfront and provision accordingly, rather than after a default as is the current norm.

It has been decided "to constitute a Working Group in order to get independent inputs on some of the technical aspects having a bearing on the significant transition involved," the RBI said in a release.

The newly constituted working group would be chaired by R. Narayanaswamy, former professor at IIM Bangalore, the RBI added.

The recommendations of the working group would be duly factored in while framing the draft guidelines, which shall be put in the public domain for comments before the issue of final guidelines, the central bank said.

Indian lenders are yet to transition to the ECL method. In May, Morgan Stanley had estimated that the switch to using the ECL method could hit 1% to 2.5% of loans at state-run banks.