RBI evokes changes in credit risk standards for banks

The reserve bank proposed on Tuesday replacing the provisioning framework based on losses incurred by a provisioning based on expected credit losses (ECL) in order to further strengthen credit risk management practices and to promote greater comparability between financial institutions.

The proposed guidelines should improve credit risk management practices and promote better comparability of the declared financial data between institutions.

The “Reserve Bank of India (SCHEDUled Commercial Banks & All India Financial Institutions – Asset Classification, Provisioning and Incomes Recognition) Directions project also aims to align regulatory standards with internationally accepted regulatory and accounting standards.

The introduction of step criteria for the classification of assets within the framework of the ECL approach, while retaining existing standards for the classification of non -efficient assets (NPA), is a key element of the proposed framework.

The alignment of income accounting standards based on the effective interest rate method (TIE) and the main principles of model risk management for the implementation of ECL models are other objectives behind the modification of the regulations in force.

The RBI has said that even if the proposed orientations should result in additional punctual provisioning, the overall impact on minimum regulatory capital requirements of banks should be minimal, all banks continuing to fully meet the requirements.

The transitional trajectory offered over five years will facilitate more transition without disruption.

Announcing the fourth bi-monetary monetary policy for the exercise earlier this month, the Governor of the RBI, Sanjay Malhotra, said that the provisioning framework for prudential floors should be made applicable to all programmed commercial banks (excluding small financial banks (SFB), payment banks (PB), regional rural banks (RRB) Indian financial institutions (AIFI) from April.

In January 2023, the RBI published a project of guidelines for the adoption of the expected credit loss approach in terms of credit depreciation.

Under the ECL standards, the banks would be required to classify financial assets (mainly loans, including irrevocable loan commitments, and investments classified as held until their maturity or available for sale) in one of the three categories – Stage 1, Stage 2 and Stage 3, depending on the credit loss evaluated on them at the time of initial accounting as well as each constitute the necessary provisions.

The RBI has also published a project of standards on the implementation of the revised framework of Basel on the standardized approach to credit risk for scheduled commercial banks, excluding small financial banks, payment banks and regional rural banks.

The “2025 orientation project of the Reserve Bank of India (Scheduled Commercial Banks – Capital Charge for Credit Risk – Standardized Approach), 2025” aims to implement one of the key elements of global reforms implemented by the Basel Committee on Banking Control (CBCB), adapted to the Indian context.

“The instructions are changing the existing standard approach to calculate the capital requirement for credit risk in order to improve its robustness, its granularity and its risk sensitivity,” said RBI.

The major revisions of existing standards include a nuanced and granular weighting treatment for exhibitions on businesses, MPMs and real estate; And the inclusion of “operators” in the regulatory category of retail trade, where operators are credit cards that have made reimbursements on time during the previous 12 months.

The central bank invited the public and the stakeholders to formulate comments on the project of guidelines by November 30, 2025.