RBI’s ECL shift to hit banks’ capital ratios sharply ahead

New provisioning norms may strain banks’ capital, but strong buffers should absorb impact smoothly

The Reserve Bank of India’s proposed shift to an expected credit loss (ECL) framework could result in a one-time impact of up to 120 basis points on banks’ core capital ratios, though lenders are expected to remain resilient, according to CRISIL Ratings.

In a recent note, the agency said the transition from the current incurred-loss model to a forward-looking ECL framework may lead to a gross hit of up to 170 basis points on Common Equity Tier-1 (CET-1) ratios. 

However, after accounting for existing provisions, the net impact is likely to moderate to around 120 basis points.Importantly, banks will be allowed to spread this impact over four financial years, reducing immediate pressure on balance sheets.  Additional provisioning buffers already built by lenders are also expected to cushion the transition. The new framework introduces a three-stage asset classification system based on probability of default, loss given default and exposure at default, along with stricter provisioning norms. It is set to come into effect from April 1, 2027, aligning India’s banking regulations with global standards.

CRISIL highlighted that the biggest impact will arise from Stage II assets, where provisioning requirements will increase significantly compared to current norms. However, the relatively small share of such assets—around 2–2.2% of total loans—will help contain the overall effect. 

The framework will also extend provisioning to off-balance-sheet exposures and undrawn credit limits, leading to a structural rise in credit costs over time.Despite this, Indian banks remain well-capitalised, with CET-1 ratios at about 14% and steady profitability levels. Analysts believe the sector is well positioned to absorb the changes while maintaining stable credit profiles.   Overall, the move is expected to strengthen risk management, improve transparency, and enhance the banking system’s resilience against future shocks.