In April 2025, the Reserve Bank of India (RBI) released draft guidelines proposing a fundamental shift from the current incurred-loss provisioning framework to an Expected Credit Loss (ECL) approach for Scheduled Commercial Banks (excluding Regional Rural Banks, Small Finance Banks, and Payments Banks). These guidelines, set to take effect from April 1, 2027, aim to align India’s prudential norms with global financial reporting standards under IFRS 9, enhancing transparency, comparability, and resilience in the banking sector.
The new framework introduces staging criteria for asset classification, updates income recognition principles, and mandates robust governance and model risk management practices for ECL estimation.
For banks in India, the adoption of this new ECL framework is not just an upgrade from the existing incurred-loss framework; it will require close integration between Finance and Risk, as forward-looking credit models will need to be used, relying on trustworthy historical data.
Who is impacted by the RBI’s ECL regulation?
- Scheduled commercial banks: All Scheduled Commercial Banks in India (except Regional Rural Banks, Small Finance Banks, and Payments Banks) are directly subject to these directions. It also includes public sector banks, private sector banks, and foreign banks operating in India.
- Banking groups and consolidated entities: Banks preparing consolidated financial statements must ensure subsidiaries and joint ventures align with the ECL framework for group reporting.
- Finance and Credit risk functions: Finance departments, risk management teams, and internal audit functions will need to adapt to new governance, model validation, and disclosure requirements.
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Technology and data teams: Significant impact on IT and data teams for implementing systems capable of:
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Maintaining a history of qualitative and granular data
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Flexible forward-looking macroeconomic modeling for PD, LGD, and EAD
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Integrating finance and risk data in a sustainable way
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Providing end-to-end transparency.
Key regulatory changes
- Three-stage ECL model: Banks must classify financial instruments into Stage 1, Stage 2, or Stage 3 based on credit risk deterioration and apply corresponding provisioning:
- Stage 1: 12-month ECL
- Stage 2: Lifetime ECL (significant increase in credit risk)
- Stage 3: Lifetime ECL (credit-impaired assets)
- Scope of application: Includes loans, debt securities (not measured at FVTPL (fair value through profit or loss)), trade and lease receivables, loan commitments, off-balance sheet exposures, and other financial assets with contractual cash flows.
- Prudential floors: Whereas IFRS 9 is principle-based, RBI has introduced specific product-wise minimum provisioning floors for Stage 1 and Stage 2 exposures, acting as regulatory backstops.
- Governance and model risk management: Banks must establish board-level oversight, maintain model inventories, and implement structured validation and monitoring frameworks.
- Forward-looking information: ECL must incorporate macroeconomic forecasts and scenario analysis, with clear documentation of assumptions and judgment.
- Transition arrangements: Banks may spread the impact on profitability and capital adequacy over a four-year period (FY 2027-2031). This period also allows banks to review and improve their IT and data architecture, test and refine their risk models, establish governance, and enhance staff expertise.
- Disclosures: Enhanced transparency through detailed reporting on credit risk management practices, ECL methodologies, and reconciliation of loss allowances.
Milestones
- April 1, 2025: Draft directions released
- June 30, 2025: End of consultation period
- March 31, 2026: Final directions expected
- April 1, 2027: Effective date of IFRS 9 ECL framework
- March 31, 2031: End of transition period
Implications for financial institutions
The transition to ECL under IFRS 9 represents a significant shift in credit risk management and provisioning practices. Banks will need to:
- Upgrade data infrastructure and segmentation capabilities
- Develop and recalibrate internal models for PD, LGD, and EAD
- Use macroeconomic forecasting
- Ensure compliance with RBI’s governance and disclosure requirements
- Set up stage assessment
- Set up configuration floors
- Calculate expected losses for different stages and scenarios
- Account for expected losses, changes, and movements
- Disclose transition and accounting changes
How can Regnology help
Leveraging on a multitude of Expected Credit Loss implementations across the globe, Regnology Finance Hub supports banks in India with:
- Data management: Builds a high-quality and ready-to-use history of data as input for the models and calculations
- End-to-end ECL calculation: Automates the ECL calculations with PD, LGD, and EAD model hosting across portfolios
- Scenario management: Enables multi-scenario forecasting and probability-weighted outcomes
- Governance and auditability: Provides full traceability of assumptions, overrides, and model changes
- Accounting: Generates multi-GAAP and multi-currency journals and balances with full audit trail to the originating transactions and calculations
- Reporting: Aligns with RBI’s disclosure templates and supervisory expectations
Our finance solution is designed to help Indian banks meet the RBI’s 2025 Directions with confidence, ensuring compliance, transparency, and operational efficiency.
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