Reserve Bank of India (RBI) has announced a sweeping overhaul of banking regulations, issuing 14 final directions on asset classification, provisioning, and income recognition that will fundamentally change how commercial banks recognise and prepare for bad loans.
The central bank says the revised norms will come into effect from 1 April 2027 and follow extensive stakeholder consultations after a draft was released in October last year.
Under the ECL framework, banks will be required to assess at every reporting date whether the credit risk associated with a financial asset has increased significantly since it was first recognised. If there is no such increase, provisions will be based on expected losses over the next 12 months. However, where credit risk has risen materially, lenders will need to account for expected losses over the entire life of the asset, thereby increasing provisioning requirements.
RBI has introduced a three-stage approach for classification under the ECL system. Financial instruments that have not seen a significant rise in credit risk will fall under stage-1, while those with a marked deterioration in credit quality since origination will be placed in stage-2. Assets classified as stage-3 will be treated as credit-impaired at the reporting date. This staging mechanism is expected to make provisioning more sensitive to changes in borrower risk profiles.
Despite the shift to a forward-looking system, RBI has retained the existing definition of a non-performing asset (NPA), under which a loan is classified as non-performing if repayments are overdue for more than 90 days. The central bank rejected suggestions to remove references to NPAs, stating that the framework remains widely understood and embedded across regulatory and statutory systems.
The regulator also declined requests from banks for more time to implement the new system. Lenders had argued that additional time was required to build robust databases, upgrade technology infrastructure and develop internal risk models. However, RBI maintained that a one-year preparation period is adequate, noting that banks must strengthen their systems in line with the new requirements within the stipulated timeline.
To ease the transition, RBI has introduced a calibrated framework to manage the potential one-time impact on bank capital arising from higher provisions under ECL. It has also allowed a three-year window for the application of the effective interest rate method to existing loan accounts, along with providing guidance on key implementation challenges.
The final directions incorporate several changes based on feedback received from stakeholders. The provisioning floor for individual housing loans under stage-1 has been retained at levels comparable to existing norms but reduced to 0.25%. RBI has also created a separate category for exposures involving direct lending to state governments and certain state government-backed loans, prescribing a stage-2 provisioning floor of 2.5% for such exposures.
In the case of purchased or originated credit impaired (POCI) assets, RBI has clarified that these will be treated as a separate category and will require recognition of lifetime expected credit losses, instead of being grouped under standard stages.
At the same time, the central bank has resisted calls for highly detailed implementation guidelines, emphasising that the ECL framework is principle-based and must be tailored to each bank’s business model, portfolio composition and data capabilities. It noted that a uniform, granular framework would not be appropriate given the diversity across lenders.
The new directions also refine the identification of stressed accounts by outlining conditions such as overdraft (OD) accounts remaining out of order, working capital accounts showing prolonged irregularities, bills remaining overdue beyond 90 days and delays in the review or renewal of credit limits beyond prescribed timelines.
In its official release, RBI says that feedback on the draft issued on 27 October 2025 had been examined and appropriate modifications had been incorporated before finalising the directions. The notification formalises 13 amendment directions along with one repeal direction as part of the regulatory overhaul.
The transition to the ECL framework is expected to significantly change the provisioning landscape for banks, likely leading to higher upfront provisions but offering a more realistic and timely assessment of credit risk. While the move may impact short-term profitability, it is aimed at strengthening the long-term stability and resilience of the banking system.
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