RBI Introduces New Credit Loss Framework to Bolster Financial Sector Resilience

The Reserve Bank of India (RBI) has unveiled a significant update aimed at strengthening the financial sector's resilience. By April 1, 2027, the expected credit loss (ECL) framework will be mandatory for all financial institutions. This framework, featuring prudential floors, will be implemented across Scheduled Commercial Banks—excluding Small Finance Banks, Payment Banks, and Regional Rural Banks—alongside All India Financial Institutions.

Governor Sanjay Malhotra detailed these provisions during the announcement of the RBI's fourth bi-monthly monetary policy. He noted that institutions will be allowed a transition period until March 31, 2031, to accommodate the potential impact of heightened provisioning on their financial reports. This initiative is expected to improve credit risk management practices and standardize financial reporting among banks.

Furthermore, the revised Basel III capital adequacy norms are set to become effective by April 1, 2027. These adjustments, which propose reduced risk weights, are anticipated to cut overall capital requirements, particularly for MSMEs and residential real estate. Additionally, a new risk-based deposit insurance premium structure is expected to incentivize sound risk management by offering financial benefits to higher-rated banks.

(With inputs from agencies.)