Proposed Changes in Provisioning Requirements by RBI
India's central bank, the Reserve Bank of India (RBI), has proposed new provisioning requirements for lenders under an expected credit loss (ECL) framework to improve credit risk management and align with global standards.
Main Provisions
- Unsecured Loans:
- 100% provisions required after one year of being classified as credit impaired.
- Other Loan Categories:
- 100% provisions required after four years of being classified as credit impaired.
Minimum Provisioning Floors
- Provisioning floors will range from 0.25% to 5% for performing assets, based on asset class and credit risk stage.
- Unsecured Retail Loans and Corporate Exposures:
- Highest Stage 2 provisioning floor of 5%.
- Farm Loans and Small Enterprise Loans:
- Lower provisioning floor of 0.25% in Stage 1.
Transition from ICL to ECL Framework
The ECL framework will replace the current Incurred Loss (ICL) framework. Non-Banking Financial Companies (NBFCs) have already adopted this model.
Three-Stage Model for Asset Classification
- Stage 1 Assets: Require 12-month ECL provisioning.
- Stage 2 and Stage 3 Assets: Require lifetime ECL provisioning due to significant credit risk increase or impairment.
- Stage 3 Assets:
- Provisioning requirements increase with the duration of impairment.
- Unsecured loans require 100% provisioning after one year in Stage 3.
- Secured loans (e.g., home and gold loans) see a stepped-up provisioning from 10% to 100% over four years.
