PSU Bank Shares Fall Nearly 3% after RBI Holds Firm on New Bad Loan Framework

Shares of public sector banks fell on Tuesday, April 28, after RBI rejected requests for more time to shift to a new system for recognising bad loans, known as the Expected Credit Loss (ECL) framework. The central bank made clear the new rules will come into effect from April 1, 2027.

The Nifty PSU Bank index was trading 1.1% lower at 8,757.6 as of 10:30 AM, with Union Bank of India, Bank of India and Canara Bank leading the losses. The broader Nifty Bank index was down 0.5%.

By 12:29 PM, Canara Bank had fallen 2.67% to ₹136.75, while Union Bank of India was trading 3.41% lower at ₹170.10. Shares of State Bank of India and Bank of India were down 1.62% and 1.97%, respectively.

What Is the ECL Framework?

Under the current system, banks set aside money, called provisions, only after a loan begins to turn bad. The ECL framework requires banks to anticipate potential losses and set aside capital earlier, making them better prepared for stress.

Under the new rules, certain loans will be treated as less risky and will attract a lower risk weight of 75%, meaning banks will not need to hold as much capital against them. To qualify, a loan must be extended to an individual or a small business with a turnover of up to ₹500 crore, must be a standard product such as a home loan, education loan, or term loan and must not exceed ₹10 crore per borrower. Credit card dues that are fully paid on time will also be treated more favourably.

Which Loans Face Stricter Rules?

The RBI has also been clear about loans that will not receive this benefit. Most personal loans, unpaid credit card balances, and loans linked to stock markets, derivatives, or real estate will be treated as higher risk. Banks will be required to hold more capital against these.

Unsecured personal loans and revolving credit card dues will continue to carry a risk weight of 125%, while loans that do not qualify for the retail category will generally carry a 100% risk weight. The RBI has also retained the option to raise risk weights for specific banks if their loan quality deteriorates.

To ease the shift, the RBI has offered banks a gradual transition plan, provided relief for the one-time capital impact of moving to the new system, and given banks three years to apply certain rules to their existing loan books.