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RBI Final ECL Guidelines: Near-Term Pressure, Long-Term Stability

ICICIdirect Research 15 May 2026 DISCLAIMER

RBIs had announced guidelines for Expected Credit Loss (ECL) which were awaited since long. Effective from 1 April 2027, these guidelines outlines from "incurred loss" model, where banks only recognized a loss after a borrower actually missed a payment, to ECL requiring banks to set aside money (provisions) from the very first day a loan is issued.
Thus, there will be a shift from current convention of classification (Standard, Sub-standard, doubtful and loss assets) to new method (including Stage1, Stage 2 and Stage 3 classification). According to these guidelines, a bank has to start factoring provisioning on an exposure right from the time the loan becomes overdue by 30 days i.e. delay in one EMI.
According to the new guidelines, any exposure has to be classified as Stage 1 (loans where repayments are timely), Stage 2 (loans wherein repayment is due by 30-60 days) and Stage 3 (loans overdue by 90 days or NPA). While provisioning on Stage 1 exposure is largely steady at 40 bps across most of the segments, Stage 2 (30-60 days) provisioning requirement has sharply increased from current ~40 bps to 5%, which will result in higher credit cost for banks on incremental loans. Benefit in the form of lower prudential requirement at 0.25% for individual housing loans (vs. 40 bps in draft), provides some relief to banks with higher proportion of home loans.
On existing exposure, bank has to ascertain fair value and difference needs to adjusted through reserves instead of P&L account. However, banks have been allowed to include the reserves for calculation of capital adequacy which to be phased gradually in next 4 years.
At the system level, the transition is estimated to have impact of ₹50,000–60,000 crore on profitability, reflecting higher upfront provisioning requirements, it strengthens the banking system’s resilience by aligning provisioning with forward-looking risks. The impact is expected to be more pronounced for PSU banks and mid-sized lenders, with potential hit estimated at ~3–9% of net worth, while large private banks remain relatively better placed due to stronger capital buffers and superior asset quality.

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