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Shift to ECL Framework Announced, Banks Brace for Smarter Risk Management Era
(Anytime News Network | Pooja Srivastava)
India’s central bank, the Reserve Bank of India (RBI), has unveiled two crucial draft directions following its October 1, 2025 policy announcement, signaling a major shift in the country’s banking regulation landscape.
The first draft focuses on revamping the Standardised Approach for credit risk. It introduces more granular and risk-sensitive weightages for corporate, MSME, and real estate exposures. Notably, RBI proposes including “transactors” under the retail category—credit card users who have consistently paid dues on time over the past 12 months—rewarding disciplined financial behavior.
The framework also revises credit conversion factors for off-balance sheet exposures and adjusts risk weights linked to external credit ratings, factoring in rating agencies’ default histories and banks’ due diligence. These measures are expected to enhance resilience while easing capital requirements in key sectors like MSMEs and real estate.
The second draft introduces a paradigm shift from the incurred-loss provisioning system to an Expected Credit Loss (ECL) framework, aligning India with global best practices. While existing Non-Performing Asset (NPA) norms will remain intact, the ECL model will classify assets into three stages, enabling earlier risk detection and improved provisioning accuracy.
Additionally, income recognition will now align with the Effective Interest Rate (EIR) method, and guidelines for model risk management have been outlined. Although banks may face a one-time provisioning increase, the overall capital impact is expected to remain manageable.
