RBI Draft Frameworks on Bank Provisioning and Capital Requirements

On 7 October 2025, the Reserve Bank of India (RBI) released two important draft frameworks aimed at strengthening prudential regulation and improving credit risk management in banks:

• Expected Credit Loss (ECL)-based provisioning norms for stressed loans and securities.
• Frameworks are proposed to take effect from April 1, 2027.

Expected Credit Loss (ECL) Framework

Objective

To replace the current incurred-loss-based provisioning system with a more forward-looking ECL-based model, aligning Indian banking standards with IFRS 9 and global best practices.

Key Features

• Implementation timeline: Begins April 1, 2027; banks get four years (till March 31, 2031) to make additional provisions on the existing book.
• Model Components:
  • Probability of Default (PD)
  • Loss Given Default (LGD)
  • Exposure at Default (EAD)
• Three-stage Classification for Credit Risk:
  • Stage 1: No significant increase in credit risk (SICR); 12-month ECL.
  • Stage 2: Significant increase in credit risk; lifetime ECL.
  • Stage 3: Credit-impaired assets; lifetime ECL.
• Transitional Adjustment:
  • The difference between new ECL-based provisions and current provisions (as of March 31, 2027) will be added back to Common Equity Tier 1 (CET1) capital.
• Asset Classification:
  • NPAs will continue to be classified under existing norms.
  • Provisions, however, will follow ECL calculations.
• Model Risk Management:
  • Banks must adopt model governance principles to ensure accuracy and consistency in ECL computation.