Page 55 - Banking Finance November 2025

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Banks and ECL norms

O n October 7, the Reserve Bank of India (RBI) issued For loans and similar financial assets, a credit loss is the
the draft Reserve Bank of India (Scheduled
difference between the present values of the contractual
Commercial Banks-Asset Classification, Provisioning
and Income Recognition) Directions, 2025 for public cash flows that are due to the bank under the contract and
the cash flows that the bank expects to receive.
comments. These directions are proposed to be
implemented by banks and financial institutions with effect Banks and financial institutions would be transitioning to Ind
from April 1, 2027 - a possible indicator that banks and AS nearly a decade after India Inc transitioned to Ind AS. It
financial institutions will transition to Indian Accounting was generally felt that RBI was delaying the implementation
Standards (Ind AS) from this date. of Ind AS for banks since the concept of Fair Value for the
treasury portfolio and the ECL model to provide for non-
The draft directions have been structured on Ind AS 109 on
performing assets could dent the financials of any bank.
financial instruments in general and the 90-day mantra in
particular. A bank shall classify a financial asset as non- The Directions propose another solution to cushion the banks
performing assets (NPA) if interest and/or principal remains from the impact of Ind AS. It has been decided to introduce
continuously overdue for a period of more than 90 days in a transitional arrangement for the impact of ECL based
respect of a term loan, bills purchased and discounted and provisioning on regulatory capital by giving banks time to
OD/CC accounts. rebuild their capital resources following a possible negative
A credit card account where the minimum amount due, as impact arising from the introduction of ECL accounting.
mentioned in the statement, is not paid fully within 90 days
The transitional adjustment amount - the difference
from the payment due date mentioned in the statement
between the ECL required as on April 1, 2027 (computed
would be classified as NPA.
based on the balance sheet position as on March 31, 2027),
Agricultural loans would be classified and provided for based and the provisions held as per the extant IRACP norms as
on the duration of the crop season. NPAs shall be classified on March 31, 2027 -may, at the option of the bank, be added
into sub-standard, doubtful and loss asset depending on the back to the Common Equity Tier 1 (CET 1) capital. This
period they have remained in a category.
benefit shall be provided till March 31, 2031. A bank may
Banks shall use a general approach consisting of three key choose to spread the transition over a shorter period.
functions i.e. Probability of Default (PD), Loss Given Default
(LGD) and Exposure at Default (EAD) to measure expected These Directions could be officially notified soon along with
credit loss (ECL). other requirements of Ind AS standards. Banks would need
to rejig their Core Banking System (CBS) and MIS data.
The Directions contain certain broad principles to be
followed by a bank for ensuring prudence and robustness Since the ECL model is based on the expected cash flows,
while using models in the process of ECL computation. A provisioning will trickle down to the branch level. Auditors
bank shall recognise lifetime ECL for all financial instruments of banks and their branches would need to learn the new
evidencing significant increase in credit risk (SICR) since initial model and unlearn the old norms. RBI seems to have
recognition. covered all bases to ensure that the impact of the transition
For this purpose, a bank shall adopt a three-stage approach, is minimal. The insurance regulator IRDAI is expected to
based on the credit quality of the financial instrument at follow suit and issue a similar set of guidelines for insurance
the time of initial recognition, or on any subsequent companies. As the saying goes "Better late than never".
reporting date. (Source: BusinessLine)

BANKING FINANCE | NOVEMBER | 2025 | 49