Banks seek more time from RBI to meet ECL provisioning norms

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Sunil Mehta, CEO of the Association of Indian Banks, said banks sought another year from the Reserve Bank of India (RBI) to meet the criteria on expected credit loss (ECL) provisioning requirements.

“We asked the regulator to allow us a little more time to prepare ourselves for this,” Mehta said on the sidelines of an event.

We have asked them [RBI] for another year. The banking system is preparing for the worst-case scenario,” he said, adding that a few banks have already developed their systems and have data on which they can design ECL-based risk models. “I hope the system adopts it quickly.”

Analysts pegged the impact of the transition to the ECL framework to be 1-2 percent of their loan portfolios, but the result is expected to be higher for PSBs of 4-5 percent, including capital requirements for the overall shift to direct investment. -like.

Last week, Canara Bank disclosed provisioning requirements of Rs 42,000 crore, which is 5 per cent loans and 7 per cent risk weighted assets, to move to ECL and Ind-AS standards.

“Given the significant hit to capital of Canara Bank and other PSU banks, even on a rolling (5-year) basis, we believe standards could be deferred/relaxed,” Emkay Global Financial said in a note.

discussion paper

The Reserve Bank of India, in January 2023, issued a discussion paper proposing an ECL provision framework for banks to bring them on par with non-bank financial firms. Experts see the final guidelines to be released in the current fiscal year, with implementation effective from April 2025.

Morgan Stanley Research recently stated that the stock of unallocated bad loans; A proven track record of asset quality; Contingency Provisions Profile rating and potential change in loan mix to safer segments, if any; Equity ratios will be the factors that determine the impact.

Larger PSBs such as Canara Bank and Punjab National Bank are the hardest hit, due to their relatively low coverage and equity ratios, increased slippage and credit costs. Bank of India has a poor track record in asset quality, but better coverage and capitalization ratios, while Bank of Baroda is well capitalized and covered, as well as a better asset quality track record.

SBI has relatively less capital, but better coverage and a proven track record of asset quality. Moreover, its share of retail loans increased as asset quality performed better, although this could be partially offset by higher unsecured loans.

“Given where the cost of credit is, we should be able to absorb any ECL provisions within the normal cost of credit. The trajectory of improvement we have seen in earnings should not be affected because the RBI also said It will be implemented over a period of time.