RBI's ECL Norms May Impact Banks' CET-1 Ratios By Up To 120 Bps: Crisil Ratings

(MENAFN- KNN India) New Delhi, May 4 (KNN) The Reserve Bank of India's (RBI) final guidelines on shifting to an expected credit loss (ECL) framework are likely to result in a one-time net impact of up to 120 basis points (bps)on banks' Common Equity Tier-1 (CET-1) ratios, according to Crisil Ratings.

However, banks will be allowed to spread this impact over four financial years, reducing the immediate burden. Additional provisioning buffers already maintained by lenders could further soften the effect.

Strong Capital Buffers to Absorb Transition

In a press release, the ratings agency noted that despite the capital impact, banks' overall credit profiles are expected to remain stable, supported by strong capitalisation levels. The banking system's CET-1 ratio stood at around 14 per cent as of March 31, 2026, indicating adequate buffers to absorb the transition.

Subha Sri Narayanan, Director, Crisil Ratings, said,“As banks migrate from the existing incurred-loss-based model to a forward looking ECL framework for provisioning, the gross impact on their CET-1 ratio is expected to be up to 170 bps for most, varying based on portfolio composition, past asset quality track record and existing provisioning levels.”

“However, with a few large banks having sizeable contingency provisioning and some others bolstering theirs, the net impact factoring in provisions made till date is expected to be significantly lower at up to 120 bps,” Narayanan added.

Three-Stage Provisioning Framework Introduced

The RBI's new framework introduces a three-stage asset classification system based on parameters such as probability of default (PD), loss given default (LGD), and exposure at default. It also sets minimum provisioning thresholds across asset categories to ensure prudence.

The norms, largely aligned with draft guidelines issued in October 2025, will come into effect from April 1, 2027.

Higher Provisioning for Select Asset Classes

Crisil emphasised that the overall impact, estimated at up to 170 basis points, reflects the difference in provisioning between the existing IRAC norms and the new ECL framework across asset categories.

For Stage I assets, minimum provisioning levels are broadly similar to current norms but act only as a floor, with actual requirements potentially higher.

The transition is expected to have the highest impact on Stage II assets, where minimum provisioning requirements could rise significantly compared to current norms. However, the relatively low share of such assets in the system is likely to limit the overall effect.

For Stage III assets, the impact may be muted given already high provisioning levels for non-performing assets.

The new framework will also extend provisioning requirements to off-balance-sheet exposures and undisbursed credit lines.

Structural Rise in Credit Costs Likely

Vani Ojasvi, Associate Director, Crisil Ratings, said,“The new ECL directions will have not only a one-time transition impact but also lead to a structural increase in credit costs for the banking system to some extent. This is because banks will have to provide more for incremental Stage III assets compared with the current 15 per cent mandate for sub-standard assets.”

“Additionally, provisions will be higher even for delinquent assets that haven't yet reached Stage III. While banks are currently in an improved profitability cycle, they will need to proactively focus on bolstering their net interest margins and controlling operating expenses to mitigate this impact,” Ojasvi added.

Alignment with Global Standards

The ECL framework is expected to strengthen the resilience of the banking sector by enabling earlier recognition of credit risks. It also aligns India's provisioning practices with global financial reporting standards, improving transparency and accountability.

Overall, Crisil expects the transition to enhance risk management practices without materially affecting the credit strength of banks.

(KNN Bureau)

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