RBI Proposes Shift to Expected Credit Loss Framework
The Reserve Bank of India has proposed replacing the incurred-loss-based provisioning with an expected credit loss framework. This move aims to enhance credit risk management, align with international standards, and improve financial comparability across institutions, set to be implemented by April 2027.
- Country:
- India
The Reserve Bank of India (RBI) has introduced a proposal to transition from the current incurred-loss-based provisioning system to an expected credit loss (ECL) framework. This shift is intended to bolster credit risk management and ensure financial statements can be compared more effectively across different institutions.
The RBI's draft outlines, titled 'Reserve Bank of India Directions, 2025,' seek to align India's regulatory norms with global accounting standards, incorporating staging criteria for asset classification under the ECL approach. Furthermore, the move includes aligning income recognition norms with the Effective Interest Rate method.
These changes are expected to result in minor adjustments to banks' regulatory capital requirements, managed smoothly through a proposed five-year transition period. The plan, announced by RBI Governor Sanjay Malhotra, will take effect from April 2027 for Scheduled Commercial Banks, excluding specific small finance and regional banks.
(With inputs from agencies.)
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