RBI unveils final ECL norms, sets April 2027 deadline for new asset classification framework

Mumbai: The Reserve Bank of India (RBI) on Monday released its final guidelines on asset classification and provisioning for lenders, marking a significant shift toward a more forward-looking risk assessment framework.

The rules, which were first proposed in draft form in October last year, will come into force from April 1, 2027, despite banks urging the regulator to delay implementation.

At the heart of the new framework is the introduction of the Expected Credit Loss (ECL) approach, a global standard that requires banks to proactively estimate potential losses on their loan portfolios.

Unlike the existing system, which largely relies on incurred losses, the ECL model compels lenders to account for likely future defaults and build adequate financial buffers in advance.

Under the new norms, banks will adopt a “staging framework” to classify financial assets based on changes in credit risk since initial recognition.

If there is no significant increase in credit risk, the asset will fall under Stage 1, where lenders will provide for losses based on a 12-month expected credit loss estimate.

However, if credit risk has risen meaningfully, the asset will move to Stage 2, requiring provisioning based on lifetime expected losses, even if the loan is not yet impaired.

Stage 3 will include credit-impaired assets, where borrowers are already facing financial stress.

These assets will attract the highest level of provisioning, reflecting the elevated risk of default.

The RBI clarified that while the ECL-based staging system will reshape how banks assess and provide for risk, the existing norms for identifying non-performing assets (NPAs) will remain unchanged.

“The draft Directions proposed amendments to the existing standardised approach framework for calculating the capital charge for credit risk with the objective of enhancing its robustness, granularity, and risk sensitivity as well as convergence with the international standards,” the central bank said in its circular.

Loans will continue to be classified as NPAs if repayments are overdue for more than 90 days.