The Reserve Bank of India (RBI) has introduced a new framework for asset classification, provisioning and income recognition, coming as a major overhaul of how banks recognise stress and provision for credit risk, with a shift towards a forward-looking Expected Credit Loss (ECL) framework. RBI will move from an incurred loss model to a forward-looking ECL approach where banks now be required to provide for potential credit losses in advance, rather than waiting for a loan to turn non-performing.
Under the new framework, there will be three-stage classification system.
Sub-standard asset: An asset, which has remained NPA for a period less than or equal to twelve months.
Doubtful asset: An asset, which has remained in the substandard category for a period of twelve months.
Loss asset: An asset, where loss has been identified by a bank or internal or external auditors or the inspection conducted by the RBI, but the amount has not been written off wholly by the bank.
90-day NPA recognition stays:
Notably, the RBI has retained the 90-day NPA recognition norm, but layered the ECL system on top to ensure early risk detection.
A bank shall flag a borrower account as overdue, if so, as part of their day-end processes for the due date, irrespective of the time of running such processes, RBI said.
On NPAs, RBI said in cases where a bank has more than one exposure to a borrower, and any one
of the exposures is classified as NPA in terms of extant prudential norms, then the bank shall consider all exposures to that borrower as NPA. In other words, NPA classification shall be applied at the level of the borrower.
Jatin Kalra, Partner, Grant Thornton Bharat said, “The RBI’s final Expected Credit Loss (ECL) Directions mark a significant milestone in strengthening India’s prudential framework, moving the system towards a more forward-looking and risk-sensitive provisioning regime while preserving the robustness of the existing NPA architecture.”
“The final framework reflects a thoughtful calibration by the regulator. They have responded meaningfully to industry feedback on prudential floors, cooling period for upgrade of NPA loans, EIR implementation, and operational complexities. The transitional arrangements to spread the capital impact over multiple years does help, but most banks will have to work tirelessly to develop the databases, models and upgraded systems required for this transition,” he added.
Reacting to the RBI’s move, shares of public sector banks fell up to 3% on Tuesday.
Bank of India and Bank of Baroda, fell 3% each, while Canara Bank, PNB, Bank of Maharashtra and State Bank of India fell between 1.5% to 2.5%.
