MC Exclusive | Banks yet to receive communication from RBI on pre-emptive credit loss

It may be recalled that in a recent interview the RBI Governor Shaktikanta das said ECL norms adoption will be rolled out this year.

Banks are yet to receive any communication from the Reserve Bank of India (RBI) on the rollout of the Expected Credit Loss (ECL) norms for the current financial year, people aware of the development told Moneycontrol.

"The central bank has not communicated to banks regarding ECL norms rollout," one source cited above confirmed.

It may be recalled that in a recent interview, RBI Governor Shaktikanta Das had said that ECL norms adoption will be rolled out this year. “On ECL norms, we are working on it and it is in the final stages. It will be out in the current financial year. All the comments have come and it is in the final stages of examination,” he told CNBC-TV18 on July 11.

The ECL model proposed by the RBI would require banks to recognise stress much earlier, in contrast to the existing regime in which they make provisions after losses are incurred.

In terms of preparedness, bankers in condition of anonymity, said that most of the banks may be ready to adopt the new bad loan provisioning guidelines even if it were to be rolled out this fiscal.

Email sent to the RBI remained unanswered till the time filing of this story.

Das had further said in the interview that the central bank is also equally concerned about how it will impact the balance sheet of banks and also in some situations, it is part of their macroprudential approach.

“The balance sheet of banks has to remain strong at all times, they cannot be surprises. So all perceived risks have to be appropriately and adequately provided for. So all these ECL, project financing framework, is only to strengthen the balance sheet of banks and we are following the consultative process, we try to understand what the point of view on the other side is, what difficulties they have and then we move on to,” Das said.

Under the new framework, banks need to classify their financial assets into one of three categories - Stage 1, Stage 2, and Stage 3 - depending on the assessed credit losses on them.

This will be at a time of initial recognition as well as on each subsequent reporting date, and then make necessary provisions

The RBI, had in March 2020, rolled out regulatory guidelines for the implementation of Indian Accounting Standards (Ind AS) by non-banking financial companies (NBFCs).

The implementation of the ECL norms for banks will be an important step towards their eventual shift to the IND-AS regime.

Last October, the central bank constituted an external working group on the ECL framework for loan loss provisioning. This group aims to obtain independent insights into the intricate details related to the substantial shift involved.

The working group operated under the leadership of R Narayanaswamy, a 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.