Transitioning to ECL framework

A positive move towards expected loss-based provisioning

- ARINDAM BANDYOPADHYAY & SOUMYA KANTI GHOSH

Recently, the Reserve Bank of India (RBI) announced that Indian commercial banks will have to start implementing the expected credit loss (ECL)-based provisioning norms from April 1, 2027, according to the International Financial Reporting Standards (IFRS).

There will also be a transition path (till March 31, 2031) to smoothen the onetime impact of higher provisioning, if any, on their existing books (indicating prudential floors). The ECL norms will replace the ‘incurred loss’ model with an ‘expected credit loss’ model. Under the new norm, banks will have to adopt a forward-looking approach considering past events, current conditions and forecast information. This will provide a timely and adequate accounting treatment of loan loss provisions. Given the strong balance sheet as well as capital position of banks currently, this is the right time to introduce more risk-sensitive ECL-based provisions.