RBI’s new bad loan norms may have one time cost impact

Banks may incur higher costs in the short term in the transition to RBI’s new framework on calculating provisions for bad loans, according to experts. 

RBI introduced the expected credit loss (ECL) as a method to calculate the provisioning requirement of banks to account for losses. If the credit risk for a loan has increased significantly, the loss-allowance would be calculated on lifetime ECL and for no increase in credit risk, allowance shall be recognised on 12-month ECL, RBI directed, adding that the new norms kick in from April 2027. Further, NPAs would be classified into three stages. The first stage is considered low or no credit risk where 12-month ECL is recognised and the other two are some and high credit risk, where lifetime ECL is recognised for provisions.

“This was a much awaited change and comes in line with the IFRS -9 framework, which was introduced globally in 2008. This is akin to a forward looking model to determine the repayability of a loan from the time it is originated,” said Satyadarshi Kunal, Partner at Induslaw. He however said that the immediate impact would be a slight increase in cost if transitioning to the new method, and this may have to be transferred to the borrower.