Expected credit loss is fiction for now; SBI equipped to deal with it: SBI Chairman Dinesh Khara

RBI floated a discussion paper to move the banking system’s provisioning principles from the current ‘incurred loss’ approach to a new ‘expected credit loss’ (ECL) approach.

India’s largest commercial bank, the State Bank of India (SBI) is well equipped to handle the Reserve Bank of India’s (RBI) expected credit loss (ECL) norms, said Dinesh Khara, Chairman, SBI.

Khara, while addressing a post-results press conference said that for now, ECL is fiction. “ECL is fiction and if at all, it becomes a reality, we are very well equipped to deal with them without having any impact on our balance sheet."

Under the ECL norms, banks will be required to classify their financial assets into three categories – Stage 1, Stage 2, and Stage 3. The categorization has to be done on the bank’s assessment of any credit losses on the assets.

While highlighting that the bank is equipped to manage ECL norms, Khara also said the bank has a solid and protected balance sheet.

“We have always followed the principles to fully protect our balance sheet for any potential future events,” said Khara.

Also read: Expected credit loss provisioning could disrupt the PSU bank exuberance

ECL norms by RBI

The Reserve Bank of India (RBI) January 16, floated a discussion paper to move the banking system’s provisioning principles from the current ‘incurred loss’ approach to a new ECL approach. The step is under consideration to further enhance the resilience of the banking system, the central bank said.

As per the central bank, the current approach is inconsistent with the prudential separation of credit risk mitigation responsibilities assigned to capital and to provisions.

Also read: Private sector banks better placed to handle RBI’s expected credit loss framework: Analysts

What this means is that since provisions are not maintained with a forward-looking perspective currently, a sudden trigger can prove to overburden and eat into the capital maintained by banks.

Also, delays in recognising expected losses worsened the downswing during the financial crisis of 2007-09, noted the paper. Thus, the RBI has proposed to move banks towards the new framework, in line with NBFCs.

The RBI is yet to announce the final guidelines on ECL norms.