Reserve Bank of India (RBI) introduces Expected Credit Loss (ECL) framework for banks

Key facts

• The Reserve Bank of India (RBI) issued amendments to the framework for classification of assets, income recognition, and provisioning, shifting to an Expected Credit Loss (ECL) based approach.
• The new directions will come into force from April 1, 2027, replacing existing norms.
• The ECL framework adopts a three-stage classification system: Stage 1 for assets with no significant increase in credit risk (12-month ECL), Stage 2 for assets with significant increase in credit risk (lifetime ECL), and Stage 3 for credit-impaired assets (lifetime ECL).
• The RBI has retained existing non-performing assets (NPA) norms, where a financial asset is classified as NPA if interest or principal remains overdue for more than 90 days for term loans, or if accounts are out of order in overdraft or cash credit facilities.
• Asset classification will be applied at the borrower level, meaning if one exposure becomes NPA, all exposures to that borrower will be treated as NPA.
• ECL computation will be based on three key parameters: Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD).
• A rebuttable presumption of significant increase in credit risk is established when contractual payments are more than 30 days past due.
• The Effective Interest Rate (EIR) method is mandated for income recognition, with all loans outstanding as of March 31, 2027, required to transition to this regime by March 31, 2030.
• The RBI has prescribed prudential floors across loan categories to serve as a regulatory backstop for ECL estimates.
• Upon transition on April 1, 2027, banks must fair value their entire loan portfolio, with any difference between fair value and carrying amount adjusted against retained earnings.
• Governance of the ECL implementation must be overseen by a Board or Board-approved committee, including the Chief Financial Officer (CFO) and Chief Risk Officer (CRO).