Banks have sought another year from the Reserve Bank of India (RBI) to meet norms on Expected Credit Loss (ECL) provisioning requirements, said Sunil Mehta, Chief Executive of Indian Banks’ Association.
“We have requested the regulator to allow us little more time to prepare ourselves for this,” said Mehta on the sidelines of an event.
“We have requested them [RBI] for one more year. The banking system is gearing up for the worst-case scenario,” he said, adding that few banks have already developed their systems and have data on which they can design their ECL-based risk models. “Hope the system adopts it quickly.”
Analysts have pegged the impact of the transition to the ECL framework to be 1- 2 per cent of their loan portfolios, but the hit is expected to be higher for PSBs at 4-5 per cent, including capital requirements for the overall shift to Ind-AS.
Last week, Canara Bank disclosed provision requirements of ₹42,000 crore, accounting for 5 per cent loans and 7 per cent of risk weighted assets, for the transition to ECL norms and Ind-AS.
“Given the higher hit on capital for Canara Bank and for other PSU banks, even on a staggered basis (5 years), we believe the norms could be deferred/diluted,” said Emkay Global Financial in a note.
Discussion paper
The RBI had, in January 2023, issued a discussion paper proposing the ECL provisioning framework for banks to bring them on par with NBFCs. Experts see final guidelines being issued in the current financial year, with implementation effective from April 2025.
Morgan Stanley Research recently said that stock of un-provisioned bad loans; asset quality track record; contingency provisions; rating profile and potential change of loan mix to safer segments, if any; and capital ratios will be the factors that determine the impact.
Larger PSBs such as Canara Bank and Punjab National Bank are seen the worst hit, owing to their relatively lower coverage and capital ratios, and higher slippages and credit costs. Bank of India has weak asset quality track record, but better capital and coverage ratios, whereas Bank of Baroda has good capital and coverage, plus a better asset quality track record.
SBI has relatively lower capital, but better coverage and asset quality track record. Moreover, its share of retail loans has increased where asset quality performance has been better, though this could be partly offset by higher unsecured loans, it said.
“Given where the credit cost is, we should be able to absorb any ECL provisions within a normalised credit cost. The trajectory of improvement which we have seen in the profit should not get impacted because the RBI also said it will be implemented over a period of time,” said Bank of Baroda MD and CEO Sanjiv Chadha on Tuesday.