ECL may raise provisions, but banks seen resilient

LENDERS WITH HIGH exposure to the MSME or the unsecured segment are likely to face near-term pressure in terms of provisioning and CET-1 ratios due to the draft expected credit loss (ECL) framework, analysts said.

- KSHIPRA PETKAR

“The proposed ECL framework will generally require higher provisions across most product segments for banks,” Sachin Sachdeva, vice president, sector head -— financial sector ratings, ICRA, said.

“However, the recent significant improvement in asset quality means the overall impact will be less severe... According to ICRA, banks with thinner capital buffers and larger overdue portfolios are likely to face greater challenges during the transition and may need to raise additional capital or utilise the transition period until FY31 to absorb the impact on CET-1 ratios,” he added.

According to a report by Motilal Oswal, top private banks are well positioned for the transition to the proposed ECL model, and it estimates a limited impact on the public sector banks due to their improving asset quality and robust provision coverage ratios.

Last week, the Reserve Bank of India came out with the draft norms for ECL provisioning whichwillcome into effectfrom April 1. The central bank also gaveafive-yearglidepath forthe banks to absorb the onetime impact of higher provisions.