Forward Thinking

RBI's move to introduce provisioning for bad loans based on expected losses rather than incurred losses will act as an insurance against any systemic risks stemming from potential episodes of bad loan cycle, if any, in the future

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In early January, this year, the Reserve Bank of India (RBI) put on public domain a 'Discussion Paper on Introduction of Expected Credit Loss Framework for Provisioning by Banks' for comments and suggestions from all stakeholders including the general public. The document provides a new framework to assess the credit risks of the banking system well in advance of any actual slippages so that no systemic risks ensue from such incidence in the future.

To put it simply, RBI’s move to introduce provisioning for bad loans based on expected losses rather than incurred losses will act as an insurance against any systemic risks stemming from potential episodes of bad loan cycle, if any, in the future. Such a framework, in my view, will fortify the asset quality of the financial sector further so that the system can side step any surprises from credit risks during the business cycles going forward.