PremiumLenders will be requesting the Reserve Bank of India (RBI) to offer more clarity on the proposed expected credit loss (ECL) framework, even as they internally assess provisioning requirements
Lenders will be requesting the Reserve Bank of India (RBI) to offer more clarity on the proposed expected credit loss (ECL) framework, even as they internally assess provisioning requirements.
On 16 January, RBI released a discussion paper on transition of banks from the incurred-loss approach to the ECL model. This, RBI said, would enhance the resilience of the banking system and bring changes in the existing loan-loss guidelines.
At present, banks need to make loan-loss provisions based on an incurred- loss approach and need to provide for losses already incurred.
Bankers said while they are working on models, these must be synced with what RBI mandates them to follow as a part of the transition. There are several unanswered questions, and banks will revert to the regulator with comments before the February deadline.
For instance, what will be the base or minimum prescribed level of loss provisioning required; and how to look at loans that are in the special mention account category, or loans with delayed repayments between one and 90 days.
RBI said since the current regulatory floor provisions are for the incurred loss approach, these will be inadequate if retained in the expected credit loss approach. This makes the proposed framework stricter than the existing regime.
“We had worked on it in the past but if you look at the RBI paper, there are several questions that need to be answered. Considering that it is a benign environment on the asset quality front and things are looking better, hopefully, there will be less impact," Ramaswamy Meyyappan, chief risk officer of IndusInd Bank said during its December quarter earnings call.
Others said they were internally preparing for a potential transition to the ECL model. “On expected credit loss, we have already started (work) based on 2-3 years’ data. Last year, we translated our financial results in IndAs standard and periodically we have ben submitting these to our board. We are already in preparation (of the transition)," Shankar Sen, chief financial officer, Bank of India, said on Tuesday.
Analysts hope the fortified balance sheets of lenders will be able to withstand additional provisions required under the new framework.
India Ratings and Research said the impact on individual banks and both public and private sector lenders is expected to be divergent. This could be because of different risk management practices and could be visible in exposures, especially in sectors such as agriculture, small businesses and retail.
“An expected improvement in macro-economic condition, though benign in the near term, are going to be better from the pandemic period and statistically the data on asset quality should normalize…this should have a mitigating impact on provisioning requirements," said Prakash Agarwal, director and head. financial institutions, India Ratings and Research.
Morgan Stanley said in a report on 16 January that Indian banks have significantly improved provisioning coverage as well as capital ratios. Moreover, RBI will allow banks sufficient time for implementing as well as intending to phase out the capital impact over five years.
“Overall, we believe the potential impact on banks will be manageable based on our current asset quality expectations, unlike significant implications 3-4 years ago. Large private banks are much better placed given significantly higher floating provisions, we believe," analysts at Morgan Stanley said.