RBI's New ECL Norms to Boost Indian Banks' Resilience, Increase Micro Loan Provisioning
The Reserve Bank of India (RBI) is set to introduce new norms for banks, including the Expected Credit Loss (ECL) model, which may increase provisioning requirements, particularly for micro loans. This shift aims to align Indian banks with global standards and enhance their resilience.
From April 2027, the RBI will implement ECL for new loans. This model assesses likely losses on loans, requiring banks to recognise these in their financial statements. The transition will occur gradually until March 2031.
Scheduled Commercial Banks, excluding Small Finance Banks, Payment Banks, and Regional Rural Banks, will be most affected. Rating agencies estimate additional provisions of around 1-2% of loans. Kotak Mahindra Bank may be particularly impacted due to its lower buffer.
Microfinance loan-focused banks like Bandhan Bank, IndusInd Bank, RBL Bank, AU Small Finance Bank, and IDFC First Bank are also expected to be significantly affected. State Bank of India (SBI) has already estimated provisions for ECL compliance, reducing its earlier estimate from ₹25,000 crore to below ₹20,000 crore.
To embed ECL seamlessly into their operating model, banks will need to invest in data and governance capabilities.
The RBI's ECL implementation will bring Indian banks in line with international standards, bolstering their resilience. However, banks must prepare for increased provisioning requirements, particularly for micro loans. The transition will occur over four years, with the most significant impacts felt by certain private and microfinance-focused banks.
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