RBI forms working group to find framework for transition to credit-loss based provisioning system

The Reserve Bank of India has formed a working group to suggest a framework for a smoother transition to the proposed expected credit loss-based provisioning system.

The nine-member group will be headed by R. Narayanaswamy, a former professor of IIM Bangalore and will be represented by a cross section of bankers, and industry experts. The group is expected to give inputs on some of the technical aspects of the transition to a new regime.

The ECL approach to provisioning would be a paradigm shift from the current incurred loss-based provisioning regime, RBI said.


There were however apprehensions over the likely dent in banks' reported profits under the proposed regime.

ECL based provisions could significantly impact a few banks, India Ratings and Research said in a note. "However, the healthy operating buffers, low incremental credit costs, high provision coverage ratio and the possibility of defraying of additional provisioning requirements over a few years provide comfort," the rating company said.

Earlier in January, the central bank had released a discussion paper on the proposal inviting inputs from all stakeholders.

While RBI is examining the comments it received from a cross-section of stakeholders on the issues flagged in the discussion paper, it said it would consider the recommendations of the working group while framing
the draft guidelines. The RBI would invite public opinion before issuing the final guidelines.

The group is told to suggest factors that banks should consider for determination of credit risk based on the guidance provided in IFRS 9 and principles laid out by BCBS. The group would also recommend prudential floors for provisioning.

The RBI envisages a principle-based framework for provisioning for credit risk, which has already been implemented under International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB).

ends
Page 2 of 6