The Reserve Bank of India has proposed a shift from the existing incurred-loss-based provisioning system to an Expected Credit Loss (ECL)-based framework for banks, effective April 1, 2027.
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In a bid to align Indian banks’ provisioning standards with those of global banks, the Reserve Bank of India (RBI) today proposed replacing the incurred-loss-based provisioning framework with an expected credit loss (ECL)- based provisioning framework. The draft norms on asset classification, provisioning and income recognition will be applicable to universal banks, effective April 1, 2027.
The key elements of the proposed framework include the introduction of staging criteria for asset classification under the ECL approach, while retaining the extant norms for Non-performing Asset (NPA) classification. It specifies calibrated ceilings for broad exposure classes, separately under Stages 1, 2, and 3. Further, the alignment of income recognition norms based on the Effective Interest Rate (EIR) method and the circular highlights broad principles for model risk management in implementing ECL models.
Minimal capital impact expected, says RBI
“While the above Directions are estimated to result in an additional one-time provisioning, the overall impact on the minimum regulatory capital requirements of banks is expected to be minimal, with all banks continuing to meet the requirements comfortably. The proposed 5-year glide-path will further facilitate the transition in a non-disruptive manner,” the RBI said.
The regulator had said last week that it would soon issue ECL norms for banks to strengthen the resilience of the banking sector.
Microfinance-focused banks most exposed
According to analysts, the move to ECL will have the most significant impact on microfinance loan-focused banks. Bandhan Bank, IndusInd Bank, RBL Bank, AU Small Finance Bank, and IDFC First Bank have a higher exposure to the micro loan segment.
“The RBI plans to implement ECL for banks on new loans from April 2027 and on existing loans from April 2027 to March 2031. ECL will impact MFI banks: AU Small Finance Bank, RBL Bank, IDFC First Bank, IndusInd Bank. It will also impact state banks on existing loans,” analysts at Nuvama Research said.
SBI, Axis Bank to see limited effect
The country’s largest lender, State Bank of India (SBI), had earlier stated that it would need to create around ₹25,000 crore of provisions to comply with ECL norms. According to Nuvama, the provision requirement has now been reduced to below ₹20,000 crore. Among other large private banks, Kotak Mahindra Bank is likely to be the most impacted due to its lower buffer, while Axis Bank is expected to see a very mild impact.
Published on October 7, 2025
