RBI sets up external working group on expected-credit-loss provisioning

Mumbai: The Reserve Bank of India on Wednesday constituted an external working group on an expected credit-loss-based framework for provisioning by banks. This comes after the RBI released a discussion paper in January on shifting from the incurred-loss approach to the ECL model to make the banking system more resilient.

In the so-called expected credit loss (ECL) model proposed by the regulator, banks will have to recognize stress much earlier, in contrast to the existing regime in which they make provisions after losses are incurred.

According to RBI’s press release on Wednesday, the working group will be chaired by R Narayanaswamy, a former professor at IIM Bangalore. It will also have domain experts from academia and industry, and representatives of select banks.

The group’s remit will include laying down principles for banks while designing credit-risk models for assessing and measuring expected credit losses. It will also recommend factors for banks to consider when determining credit risk.

The RBI said it will include these recommendations while framing draft guidelines, which will be put in the public domain for comments before final guidelines are issued.

The central bank said in a press statement: “Several comments have been received from various stakeholders on the issues flagged in the discussion paper, which are being examined by the Reserve Bank. While the regulatory stance to be taken in respect of each of the issues shall be examined by the Reserve Bank, it has been decided to constitute a working group in order to get independent inputs on some of the technical aspects having a bearing on the significant transition involved.”

Analysts’ estimates peg the impact of ECL on the core capital of banks at 200 basis points (bps). The core capital — common equity tier-1 capital — of 46 banks stood at 13.7% on 31 March, according to RBI data.