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RBI’s Expected Credit Loss Model Replaces Incurred Loss

23 October 20251 min read
BANKING & FINANCERBI’s ExpectedCredit Loss ModelReplaces IncurredLoss23 October 2025safalsetu.com

Why in the news

RBI wants scheduled commercial banks to recognise credit stress early rather than after losses occur.

Incurred loss versus ECL

PointIncurred lossECL
TimingProvision after a loss eventProvision for expected future losses
Weakness or strengthLate stress signals, shocks amplifiedSpots NPAs before default, builds buffers
InputsActual defaultsPD, EAD, LGD, continuously updated

Benefits

  • Early recognition, proactive risk management and resilience.
  • Matches IFRS 9 and Basel III.

Implications

  • Better data analytics needed; short-term provisions may rise and trim profits.
  • Promotes prudent lending.

Exam angle

  • Parameters: PD, EAD, LGD.

Test yourself

1. Which three parameters form the basis of provisioning under RBI’s proposed Expected Credit Loss framework?

Provisions use probability of default, exposure at default and loss given default.

2. RBI’s ECL proposal replaces which existing provisioning model for scheduled commercial banks?

The current approach provisions after a loss event, i.e. incurred loss.

3. Which global standards is the proposed ECL framework consistent with?

The notes link ECL to IFRS 9 and Basel III guidelines.

This topic is part of Daily Current Affairs 22 October 2025 (19 topics).

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