Banks Face Capital Hit, Higher Provisions Under RBI’s ECL Framework: Crisil

The Reserve Bank of India’s move to proceed with the expected credit loss (ECL) framework could lead to a one-time net impact of nearly 120 basis points on banks’ Common Equity Tier-1 (CET-1) ratios, ratings agency Crisil Ratings said.

CET-1 is basically a bank’s core and highest-quality regulatory capital and consists of common stock and retained earnings. It acts as a buffer to absorb losses without having to cease the bank’s trading.

The overall credit profiles of banks are expected to remain stable, the report said. Further, the press release said banks would be allowed to spread the impact over four financial years, while additional provisioning buffers could mitigate the impact further.

What Does the RBI’s Direction Say?

The central bank is introducing a three-stage asset classification system based on probability of default, loss given default, and exposure at default, alongside a minimum provisioning threshold.

The direction is basically aimed at identifying default risks early on and ensuring provisioning before a loan turns into a non-performing asset. The guideline will come into effect from April 1, 2027.

“As banks migrate from the existing incurred-loss-based model to a forward-looking ECL framework for provisioning, the gross impact on their CET-1 ratio is expected to be up to 170 bps for most, varying based on portfolio composition, past asset quality track record, and existing provisioning levels,” Subha Sri Narayanan, Director, Crisil Ratings, said.

Which Asset Class Will Be Most Impacted?

According to Crisil, the most significant impact will be on Stage II assets, which are performing loans that have experienced a Significant Increase in Credit Risk. Stage II assets could see a sharp increase in provisioning requirements compared with current norms. However, it also noted that Stage II assets only contribute 2–2.2% in the banking system.

Stable Financial System

The ratings agency highlighted that the Indian financial system is stable and banks are well positioned to absorb the transition, driven by a healthy CET-1 ratio (14% as on March 31) and steady profitability. The return on assets was also stable at 1.25–1.3% in FY26.

Structural Shift

Vani Ojasvi, Associate Director at Crisil, said the ECL regime would have a structural shift in the rise in credit costs and not just a limited one-time impact. "This is because banks will have to provide more for incremental Stage III assets compared with the current 15% mandate for sub-standard assets.

Additionally, provisions will be higher even for delinquent assets that haven't yet reached Stage III. While banks are currently in an improved profitability cycle, they will need to proactively focus on bolstering their net interest margins and controlling operating expenses to mitigate this impact."

Boosting Financial Sector

The RBI’s decision to proceed with the ECL framework despite requests from banks for an extension for implementation is seen to significantly enhance the efficiency and resilience of banks and the overall financial system.

It would also align Indian banks’ practices with global standards, improving transparency, accountability, and credit risk management, the agency said.