The Reserve Bank of India (RBI) has issued updated guidelines on asset classification and provisioning for banks. These guidelines, effective from April 1, 2027, emphasize a more forward-looking risk assessment approach. One key aspect of the new framework is the adoption of the Expected Credit Loss (ECL) model, requiring banks to anticipate potential losses on their loan portfolios.
Under the ECL model, banks must consider future defaults and create financial reserves in advance, unlike the current system that focuses mainly on past losses. The guidelines introduce a “staging framework” for categorizing financial assets based on changes in credit risk. Assets will be classified into different stages depending on the level of credit risk they pose.
Assets with no significant increase in credit risk will be in Stage 1, where banks will provision for losses based on a 12-month expected credit loss estimate. In contrast, assets with a notable rise in credit risk will move to Stage 2, requiring provisions for lifetime expected losses, even if the loan is not impaired. Stage 3 will cover credit-impaired assets, indicating borrowers under financial strain and requiring the highest level of provisioning.
The RBI clarified that while the new ECL-based system will alter how banks assess and provision for risk, the existing criteria for identifying non-performing assets (NPAs) will remain unchanged. Loans will still be classified as NPAs if repayments are overdue by more than 90 days.
