RBI issues draft expected credit loss norms, suggests higher provisioning
This story was originally published at 20:09 IST on 7 October 2025
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NEW DELHI – The Reserve Bank of India on Tuesday issued draft norms on the expected credit loss framework, which will mandate banks to set aside more funds for potential bad loans on implementation, and sought public comments on the same. The framework intends to enhance the resilience of the banking system so that banks can incorporate the more forward-looking expected-credit-loss approach. Currently, banks in India follow the RBI's guidelines, where provisioning is done only after an account is recognised as non-performing.
"These directions are expected to further strengthen credit risk management practices, promote greater comparability across financial institutions, and align regulatory norms with internationally accepted financial reporting norms," the central bank said. The expected credit loss framework will be effective for banks from Apr. 1, 2027. Public comments on the draft credit loss norms should be submitted by Nov. 30, the central bank said.
Under the draft norms, banks will be required to classify non-performing financial assets into three categories based on the period for which the asset has remained non-performing and the realisability of the dues, while continuing to apply existing rules for classifying non-performing assets. Banks will also have to adopt a "three-stage" approach to identify credit risk, based on the credit quality of the financial instrument at the time of initial recognition, or on any subsequent reporting date.
"This tiering shall guide the frequency and rigour of validation efforts, ensuring higher scrutiny for models with greater impact," the RBI said. "Periodic review by an independent team shall validate the tiering approach to maintain alignment with the bank's risk profile and enhance its effectiveness."
As per the draft norms, provisioning at 'stage 1' of secured retail loans, corporate loans, loans to medium enterprises, home loans and loans against property will attract 0.40% provisioning, which will rise to 5% for all should the risks rise to 'stage 2', except for home loans and loans against property, which will call for 1.50% provisioning.
Provisioning requirements for these loans rise significantly once they enter 'stage 3', with the provisioning increasing as the duration of bad loans keeps rising.
According to the central bank, while the above norms are estimated to result in an additional one-time provisioning, the overall impact on the minimum regulatory capital requirements of banks is expected to be minimal, with all banks continuing to meet the requirements comfortably. "The proposed 5-year glide-path will further facilitate the transition in a non-disruptive manner," it added.
On Wednesday, RBI Governor Sanjay Malhotra had said that the expected credit loss framework is designed to be implemented with a suitable glide-path of nearly five years, allowing banks to transition smoothly.
The RBI had come out with a discussion paper in January 2023 on the expected credit loss approach for loan loss provisioning by banks. In October 2023, it formed an external working group on the framework for provisioning by banks. However, several industry participants raised concerns with the RBI on the changes proposed by the central bank. A joint survey by the Federation of Indian Chambers of Commerce and Industry and the Indian Banks' Association in March 2024 showed that most banks are positioned well to transition smoothly to the expected credit loss regime and have put in place models and frameworks that are being reviewed and validated internally.
According to analysts, while large private banks have sizeable contingent buffers to manage the transition, banks with high microfinance exposure could be at a disadvantage due to the increased provisioning requirements. Provisioning for unsecured retail loans in 'stage 1' of risk metric is 1%, which rises to 5% in 'stage 2' and 25% on entering 'stage 3', and goes further up to 100% once the bad loan is due over a year. End
Reported by Priyasmita Dutta
Edited by Tanima Banerjee
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