Indian banks are well-prepared to adopt the Reserve Bank of India’s (RBI) new Expected Credit Loss (ECL) provisioning framework, backed by strong capital buffers and improved asset quality, to a report by CareEdge Ratings.
The RBI has notified the Commercial Banks – Asset Classification, Provisioning and Income Recognition Directions, 2026, which will come into effect from April 1, 2027.
The new norms mandate a shift from the traditional incurred loss model to a forward-looking ECL-based framework, aligning Indian banking practices with global standards and Basel III norms.
Under the revised system, banks will be required to assess and provision for potential credit losses based on future risks rather than past defaults.
This involves classifying financial assets into three stages depending on credit risk and calculating provisions using parameters such as probability of default (PD), loss given default (LGD), and exposure at default (EAD).
The transition will also require banks to conduct a one-time fair valuation of their entire loan portfolio. Any difference between fair value and current book value will be adjusted against retained earnings, a move expected to limit volatility in profit and loss statements.
Despite the higher provisioning requirements under the ECL regime, the report noted that Indian banks are in a strong position to absorb the impact.
As of September 2025, banks reported a capital adequacy ratio (CAR) above 17% and a common equity tier-I (CET-I) ratio exceeding 14.5%. The overall impact on capital adequacy is estimated at around 60–70 basis points, which is manageable over the four-year transition period.
However, the shift is expected to exert some pressure on profitability in the near term. Increased provisioning, particularly for Stage 2 assets—where credit risk has significantly risen—could weigh on return on total assets (ROTA) during the implementation phase.
Experts suggest that while public sector banks may face relatively higher pressure due to greater exposure to unsecured and MSME segments, private sector banks are likely to see a more muted impact owing to conservative provisioning practices.
The new framework is also expected to influence lending strategies. Higher provisioning requirements for riskier assets could discourage aggressive risk-taking and promote more sustainable credit growth.