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Banks start making provisions ahead of RBI’s ECL norms
August 01, 2023
While the Reserve Bank of India (RBI) is yet to announce the final guidelines on the expected credit loss (ECL) based provisioning by banks, some lenders have started building up provisions even before migration to the new ECL regime.
Higher provisions are based on internal assessments done by these lenders on required loan-loss provisions under the proposed framework. However, a few lenders said they will start making provisions once the RBI releases the final ECL guidelines.
The country’s largest lender State Bank of India has said that it might require a provision of up to ₹25,000 crore whenever the ECL framework is implemented. According to various estimates, the banking sector’s provisioning requirement for shifting to the ECL framework will be between ₹90,000 crore to ₹1 lakh crore.
In January this year, the RBI issued a discussion paper on the introduction of the ECL framework for provisioning by banks. It said the banks will be given one year after the final guidelines are released for implementation of the expected credit loss approach for loss provisioning.
Currently, under-provisioning norms, banks are required to set aside funds for a prescribed percentage of their bad assets on an incurred loss approach, which means they need to provide for losses that have occurred or incurred.
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