Banks foresee smooth transition to expected credit loss model

Large banks like State Bank of India (SBI), HDFC Bank, and Axis Bank, as well as smaller public sector lenders, believe they can easily transition to a new credit loss model proposed by India's central bank, under which the lenders have to recognize stress much earlier than the current norms.

- Subhana Shaikh

The proposed ECL model is in contrast to the existing regime where banks make provisions after losses are incurred.

(BLOOMBERG)

Analysts bet that private lenders will fare better.

Senior bankers said lenders can manage the transition comfortably, many even before the five-year glide path ends in 2032. They believe that strong profitability will help banks tide over demands that extra provisions will make on them. In fact, even by a Reserve Bank of India (RBI) analysis published in June, adequate high quality equity capital, declining loan losses and credit costs, and solid profitability lend credibility to the soundness of the banking system in India.

Earlier this month, RBI had floated a draft circular that lays out a transition from the current “incurred loss” provisioning rule to a forward-looking expected credit loss framework for scheduled commercial banks, alongside revisions in credit-risk classification and risk weights.