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    RBI weighs introducing expected credit loss framework for loan loss provisioning for banks


    Money & Banking

    Central bank plans to issue discussion paper on the framework, says Rajeshwar Rao

    Mumbai, June 16

    The Reserve Bank of India is weighing the possibility of introducing the “expected credit loss” (ECL) approach for loan loss provisioning for banks as against the current “incurred loss” approach being followed by them.

    Under the incurred loss framework, banks recognise loan losses only when evidence of a loss is apparent.

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    If banks’ move to the ECL impairment framework, they will be required to recognise ECLs at all times, taking into account past events, current conditions and forecast information, and update the amount of ECLs recognised at each reporting date to reflect changes in an asset’s credit risk.

    ECL is a more forward-looking approach and will result in more timely recognition of credit losses, per a BIS and Financial Stability Institute Connect document.

    Speaking at IMC’s annual banking and finance conference, RBI Deputy Governor M Rajeshwar Rao said that banks in India are following the incurred loss approach for loan loss provisions, while the bigger non-banking financial companies are following the more forward-looking ECL approach for estimating loan losses.

    Loan default

    He observed that loan default itself is an outcome of build-up of stress. Hence, the incurred loss approach may be insufficient and could impact the health of the banking and financial system.

    Rao emphasised that there is a need for the expected credit loss approach wherein the stress will be recognised at an early stage.

    To achieve global convergence in regulations, the central bank I is planning to issue a discussion paper on the introduction of a framework on expected credit loss for banks, the Deputy Governor said.

    Banks were to implement the Indian Accounting Standards (Ind AS), including the ECL approach to loan loss provisioning, from April 1, 2018. But the implementation was deferred pending necessary legislative amendments to the Banking Regulation Act, 1949 as also the level of preparedness of many banks. Bigger NBFCs, however, have implemented Ind AS from April 1, 2018.

    Published on June 16, 2022

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