RBI plans to introduce an expected credit loss framework for loan loss provisioning for banks

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Bombay, June 16

The Reserve Bank of India is assessing the possibility of introducing the “Expected Credit Loss” (ECL) approach for loan loss provisioning for banks over the current “Incurred Loss” approach they follow .

As part of incurred losses, banks recognize loan losses only when they are evident.

If banks adopt the ECL impairment framework, they will be required to recognize ECL at any time, taking into account past events, current conditions and forward-looking information, and update the amount of ECL recognized at each date. closing to reflect changes in the value of an asset. credit risk.

ECL is a more forward-looking approach and will result in faster recognition of credit losses, according to a Connect document from the BIS and the Financial Stability Institute.

Speaking at IMC’s annual banking and finance conference, RBI Deputy Governor Mr Rajeshwar Rao said Indian banks are following the incurred loss approach for loan loss provisions , while larger non-banking financial companies followed the more forward-looking ECL approach to estimation. loan losses.

loan default

He observed that default itself is the result of an accumulation of stress. Therefore, the incurred losses approach may be insufficient and could have an impact on the health of the banking and financial system.

Rao stressed the need for an expected credit loss approach in which stress will be recognized at an early stage.

To achieve global regulatory convergence, the Central Bank I plans to issue a discussion paper on the introduction of an expected credit loss framework for banks, the Deputy Governor said.

Banks were expected to implement Indian Accounting Standards (Ind AS) including the ECL approach to loan loss provisioning from 1 April 2018. But the implementation was postponed pending necessary legislative changes to the Banking Regulation Act 1949, as well as the level of preparedness. many banks. However, the larger NBFCs implemented Ind AS from April 1, 2018.

Published on

June 16, 2022

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