RBI Forms Working Group for Credit Loss-Based Provisioning Transition
The Reserve Bank of India (RBI) has established a nine-member working group to propose a framework for a smoother transition to the expected credit loss-based provisioning system (ECL). The group, led by R. Narayanaswamy, a former professor of IIM Bangalore, will include bankers and industry experts. ECL provisioning represents a shift from the current incurred loss-based provisioning regime.
Technical Aspects and Profit Impact
- The working group will provide input on the technical aspects of transitioning to the ECL-based provisioning system.
- There have been concerns about the potential impact on banks’ reported profits under this new regime.
- India Ratings and Research noted that while ECL-based provisions could significantly affect some banks, their healthy operating buffers, low incremental credit costs, high provision coverage ratio, and the possibility of deferring additional provisioning requirements over several years provide comfort.
Public Input and International Standards
The RBI had released a discussion paper in January, seeking input from stakeholders on the proposal. The central bank is currently examining the comments received. It intends to consider the recommendations of the working group when framing draft guidelines.
The RBI will also seek public opinion before issuing the final guidelines. The working group will suggest factors for banks to consider in determining credit risk based on guidance from IFRS 9 and principles set out by BCBS. It will also recommend prudential floors for provisioning.
Category: Economy & Banking Current Affairs - 2024