How will RBI's new ECL framework impact lending practices?

Kolkata: India's central bank has proposed significantly higher provisioning requirements for lenders across a range of asset classes under a new expected credit loss (ECL) framework, aimed at aligning domestic norms with global standards and strengthening credit risk management.

The Reserve Bank of India has proposed 100% provisions against unsecured loans after one year of these being classified as credit impaired, while all other categories of loans will attract 100% provisions after four years of such classification.

Overall, banks may be required to maintain minimum provisioning floors ranging from 0.25% to 5% for performing assets, depending on the asset class and credit risk stage. Unsecured retail loans and corporate exposures will attract the highest Stage 2 provisioning floor of 5%, while farm loans and small enterprise loans will see a lower floor of 0.25% in Stage 1.


The ECL framework will replace the current Incurred Loss (ICL) framework for provisioning followed by banks. NBFCs have already adopted the ECL framework.

The framework introduces a three-stage model for asset classification based on credit risk deterioration. Stage 1 assets will require 12-month ECL provisioning, while Stage 2 and Stage 3 assets - those with significant increase in credit risk or credit impairment - will require lifetime ECL provisioning.

For Stage 3 assets, provisioning requirements escalate with the duration of impairment. Unsecured loans will require 100% provisioning after one year in Stage 3, while secured exposures such as home loans and gold loans will see stepped-up provisioning from 10% to 100% over a four-year period.