Banks and ECL norms

On October 7, the Reserve Bank of India (RBI) issued the draft Reserve Bank of India (Scheduled Commercial Banks-Asset Classification, Provisioning and Income Recognition) Directions, 2025 for public comments. These directions are proposed to be implemented by banks and financial institutions with effect from April 1, 2027 - a possible indicator that banks and financial institutions will transition to Indian Accounting Standards (Ind AS) from this date.

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The draft directions have been structured on Ind AS 109 on financial instruments in general and the 90-day mantra in particular. A bank shall classify a financial asset as nonperforming assets (NPA) if interest and/or principal remains continuously overdue for a period of more than 90 days in respect of a term loan, bills purchased and discounted and OD/CC accounts.

A credit card account where the minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the payment due date mentioned in the statement would be classified as NPA.

Agricultural loans would be classified and provided for based on the duration of the crop season. NPAs shall be classified into substandard, doubtful and loss asset depending on the period they have remained in a category.

Banks shall use a general approach consisting of three key functions i.e. Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD) to measure expected credit loss (ECL).