New ECL-Based System to Impact Banks’ Capital Buffers

Transitioning to the expected credit loss (ECL) system will affect banks' core capital by 1.20%. With the RBI's guidance, banks can spread costs over four years. A three-stage asset classification ensures prudence. ECL will apply to off-balance-sheet exposures, increasing credit costs but enhancing banks' resilience to shocks.

The transition to an expected credit loss (ECL) based provisioning system is projected to impact banks' core capital buffers by 1.20%, according to Crisil Ratings. The agency highlighted in its recent note that banks are allowed to spread this cost over four fiscal years, helping mitigate the initial financial impact.

This change follows the Reserve Bank of India's recent norms, which require the banking system to adopt ECL starting April 1, 2027. The directions include a three-stage asset classification based on the probability of default, loss given default, and exposure at default, with prescribed minimum provisioning thresholds to ensure prudence.

Crisil's director, Subha Sri Narayanan, noted that while the new norms define minimum provision thresholds similar to existing ones, the actual requirement could be higher for different asset classes. The final ECL guidelines aim to enhance the banking sector's resilience, maintaining stability in credit profiles despite an uptick in credit costs.