RBI constitutes external working group on ECL-based framework for provisioning by banks

Under the ECL framework, banks will have to assess expected loss on their overall financial assets and make provisions after assessment, rather than making it after the loan turns into a non-performing asset (NPA).

The Reserve Bank of India (RBI) on October 4 said that it has set up an external working group on expected credit loss (ECL) based framework for provisioning by banks.

The central bank had released a discussion paper on "Introduction of Expected Credit Loss Framework for Provisioning by Banks" on January 16, 2023 seeking comments from stakeholders.

“Based on the comments, 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 central bank said in a press release.

RBI said that the working group will be chaired by Prof. R. Narayanaswamy, Former Professor, IIM Bangalore. Additionally, the group will have eight more expert members from academia and industry as well as representatives of some banks.

Also read: ICICI Bank ready to move to ECL framework, waiting for RBI guidelines, says executive director

The list of members include Prof. Sanjay Kallapur, ISB, Hyderabad, Rajosik Banerjee, KPMG, S Srinivasa Rao, State Bank of India (SBI), Rajendra Khandelwal, ICICI Bank, Susanta Baishya, HDFC Bank, Adish Yadav, Canara Bank, Pravinkumar Taparia, Saraswat Co-operative Bank and Sridharan N, Equitas Small Finance Bank.

Here, Jaya Vaidhyanathan, CEO, BCT Digital said: "The move to ECL provisioning is a much needed one, despite potential short-term impacts on bank profitability. We believe that the recommendations of the distinguished experts of the working group, will alleviate some of these concerns and add immense value to the formulation of the draft guidelines."

Under the ECL framework, banks will have to assess expected loss on their overall financial assets and make provisions after assessment, rather than making it after the loan turns into a non-performing asset (NPA).

A loan becomes an NPA if no repayment is made of interest or principal for a period of 90 days.

In May 2023, Dinesh Khara, Chairman of State Bank of India (SBI) 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."

Khara, while addressing a post-results press conference in May 2023, also said that the bank is well equipped to handle the ECL norms.

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

These norms are meant for only scheduled commercial banks, excluding regional rural banks.

The central bank has allowed banks to design and implement their own models for measuring expected credit losses for the purpose of estimating loss provisions in line with the proposed principles.