ECL Framework Proposed to be Implemented from April 1, 2027: RBI Governor

To enhance the resilience of the financial sector, the Reserve Bank on Wednesday announced that the expected credit loss (ECL) framework for provisioning is proposed to be made applicable to all financial institutions from April 1, 2027.

Announcing the fourth bi-monthly monetary policy, RBI Governor Sanjay Malhotra said the ECL framework of provisioning with prudential floors is proposed to be made applicable to all Scheduled Commercial Banks (excluding Small Finance Banks (SFBs), Payment Banks (PBs), Regional Rural Banks(RRBs)) and All India Financial Institutions (AIFIs) with effect from April 1, 2027.

"They will be given a glide path (till March 31, 2031) to smoothen the one-time impact of higher provisioning, if any, on their existing books," he said.

The guidelines are expected to enhance credit risk management practices, promote better comparability of reported financials across institutions, he added.

In January 2023, the RBI came out with draft guidelines for the adoption of the expected credit loss approach for credit impairment.

Under the ECL norms, banks will be required to classify financial assets (primarily loans, including irrevocable loan commitments, and investments classified as held-to-maturity or available-for-sale) into one of the three categories – Stage 1, Stage 2, and Stage 3, depending upon the assessed credit losses on them at the time of initial recognition as well as on each subsequent reporting date and make necessary provisions.

Further, he said, it is proposed to make the revised Basel III capital adequacy norms effective for commercial banks (excluding SFBs, PBs and RRBs) from April 1, 2027.

"In furtherance of this, a draft of the Standardised Approach for Credit Risk shall be issued shortly. Under the revised approach, the proposed lower risk weights on certain segments are expected to reduce the overall capital requirements, particularly for MSMEs and residential real estate (including home loans)," he said.

It may be recalled that capital requirements for operational risk have already been finalised (in 2023), whereas the capital requirements for market risk are under finalisation after receipt of comments from the public, the governor said.

These measures will help align RBI's guidelines with international standards adapted to our national conditions and priorities, and strengthen the capital adequacy framework for banks and All India Financial Institutions.

Malhotra further said a draft circular on Forms of Business and Prudential Regulation for Investments was issued in October 2024, and it has been finalised after public consultations and will be issued shortly.

"The proposed regulatory restriction on overlap in the businesses undertaken by a bank and its group entity(ies) is being removed from the final guidelines. The strategic allocation of business streams among group entities will be left to the wisdom of Bank Boards," he said.

It is further proposed to introduce risk-based deposit insurance premiums with the currently applicable flat rate of premium as the ceiling, he said, adding that this will incentivise sound risk management by banks and reduce the premium to be paid by better-rated banks.

Deposit Insurance and Credit Guarantee Corporation (DICGC), under the DICGC Act, 1961, has been operating the deposit insurance scheme since 1962 on a flat rate premium basis.

At present, the banks are charged a premium of 12 paise per ₹100 of assessable deposits. While the existing system is simple to understand and administer, it does not differentiate between banks based on their soundness.

"It is, therefore, proposed to introduce a Risk-Based Premium model, which will help banks that are more sound to save significantly on the premium paid. Detailed notification will be issued shortly, which will be effective from the next financial year," he said.