Why in the news
Lenders prepared to lobby the RBI against the steep jump in Stage-II provisioning proposed in its draft Expected Credit Loss rules.
Key facts
- ECL is a forward-looking system: banks estimate likely future defaults and park money accordingly, rather than waiting for a default.
- Aligned with IFRS 9; planned start 1 April 2027, with a 4-year transition to FY31.
- Draft floor for Stage-II assets: 5%, against 0.4% now.
- The jump would hurt most those banks with large stressed retail and MSME books.
| Stage | Meaning | Provision basis |
|---|
| Stage-I | No significant rise in credit risk since origination, or low risk | 12-month expected losses |
| Stage-II | Significant rise in credit risk (SICR) but not yet impaired | Lifetime expected losses |
| Stage-III | Credit-impaired at reporting date | Lifetime expected losses, higher intensity |
| Parameter | Today | Draft ECL |
|---|
| Basis | Incurred loss | Expected credit loss |
| Stage-I provision | Roughly 0.25-0.40% | Little change likely |
| Stage-II provision | 0.4% for SMA-1 and SMA-2 accounts | Floor of 5% |
| Stage-III | 15%-100% by asset quality | To carry on |
Objectives
- Move from a reactive approach to a proactive one.
- Build credit-risk buffers earlier in a loan’s life.
- Match Indian standards with IFRS 9.
Exam angle
- ECL replaces the incurred-loss model.
- SMA = Special Mention Account.
- Dates: start 1 April 2027; transition to FY31.