RBI's ECL norms to improve risk management of loans set to kick in from April 2027

Reserve Bank of India

The Expected Credit Loss (ECL) framework of provisioning for bad loans, with prudential floors, is proposed to kick in from April 1, 2027, the Reserve Bank of India (RBI) Governor Sanjay Malhotra said on October 1, during the monetary policy announcement.

The norms will be applicable to Scheduled Commercial Banks (excluding Small Finance Banks (SFBs), Payment Banks (PBs), Regional Rural Banks (RRBs)) and All India Financial Institutions (AIFIs), the Governor added.

"The new ECL guidelines (yet to be released) with prudential floors will be implemented from 1 April 2027 and a transition period of 5 years will be given. As per rating agencies, the additional provisioning impact based on earlier rules was 1-2% of loans, " Macquarie said in a note.

What are ECL Norms

The guidelines are expected to enhance credit risk management practices and promote better comparability of reported financials, across institutions. The framework is designed to be implemented in a non-disruptive manner with a suitable glide-path, RBI said during the October 1 MPC statement.

The ECL model, proposed by the RBI, mandates that banks will have to recognize stress much earlier, in contrast to the existing regime in which they make provisions after losses are incurred.

Other Similar Steps by RBI

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, on the other hand, will be an important step towards their eventual shift to the IND-AS regime.

RBI MPC Outcome

The RBI’s Monetary Policy Committee (MPC) decided to keep the benchmark repo rate unchanged at 5.5 percent on October 1, for a second review in a row, along with the stance unchanged to 'Neutral'. The MPC considered it prudent to wait for impact of policy actions to play our before charting the next policy action.

As a result, the standing deposit facility (SDF) rate remains unchanged at 5.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 5.75 per cent.

The decision was in line with Moneycontrol’s poll of economists and bankers who predicted the RBI’s Monetary Policy Committee (MPC) will hold rates due to comfort from the higher growth in the first quarter while taking time to assess the data on the Goods and Services Tax (GST) reforms.