The Reserve Bank of India (RBI) issued a new Expected Credit Loss (ECL) draft, marking a turning point for Indian banks. 

Effective from April 2027, the ECL regime will require banks to provision for potential credit losses instead of waiting for them to become bad loans. SEBI-registered analyst Front Wave Research explained that this meant lenders will move from the 'incurred loss' model to 'expected loss', which will be a proactive approach to recognizing risk.

What Changes: Shift from Reaction To Prediction

By employing probability-based models that combine Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD), banks will be required to provision for losses earlier. This shift aims to create cleaner balance sheets, though it is likely to impose higher short-term costs, Front Wave noted. 

While the initial impact of RBI's moves would be a compression in profitability, as banks report higher provisioning, analysts believe that over the longer term, it would translate into stronger buffers, smoother earnings, and better investor confidence in the banking sector's health.

Who Gets Impacted The Most?

The impact of the ECL framework will be varied across segments. Housing loans stand to benefit as lower risk weights mean less capital per loan. This would help unlock lending potential and boost retail credit growth, especially from large private banks.

On the other hand, the MSME segment may face higher provisioning initially, but may move towards more disciplined underwriting and prudent credit assessment over time.

Front Wave also noted that corporate loans may see a neutral-to-slightly negative near-term impact due to higher provisioning on lower-rated borrowers. However, well-rated corporates could even benefit from lower expected losses.

And lastly, unsecured loans will remain the most affected segment, as lenders will need to allocate heavier provisions and reassess their risk appetite to maintain balance sheet health.

Front Wave cautioned that banks with higher unsecured or microfinance exposure and those with more Special Mention Account (SMA) accounts could face increased provisioning requirements. While the ECL framework tightens risk recognition, the lower housing loan risk weights act as a counterbalance, fueling volume-led credit growth.

This dynamic makes India's banking system both safer and more growth-ready, according to them.

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