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The Reserve Bank of India's new Expected Credit Loss (ECL) framework, set to take effect from April 1, 2027, is projected to cause a one-time net capital impact of up to 120 basis points on banks' Common Equity Tier-1 (CET-1) ratios, according to CRISIL Ratings. The gross impact could reach up to 170 bps, with existing provisions reducing the net effect.

What is the ECL Framework?

Currently, Indian banks follow the Incurred Loss Model — provisions are made only after a loan shows stress or becomes a Non-Performing Asset (NPA). This reactive approach often recognises risk too late, allowing banks to report healthy books even when early warning signs are visible.

The ECL framework shifts this to a forward-looking approach. Banks must now estimate losses before default by assessing three parameters:

• Probability of Default (PD)
• Loss Given Default (LGD)
• Exposure at Default (EAD)

The new norms are broadly aligned with IFRS 9, the global accounting standard adopted internationally after the 2008 financial crisis to make banking systems more resilient.

Three-Stage Asset Classification

The ECL framework classifies all loan assets into three stages based on credit risk:

Stage I — Low or no significant increase in credit risk. Banks provision for 12-month expected credit loss. Minimum provisioning levels are broadly similar to current norms but serve only as a floor.

Stage II — Significant increase in credit risk, but not yet an NPA. Banks must provision for lifetime expected credit loss. This stage carries the highest transition impact — Stage II assets currently form only 2–2.2% of the banking system, which will help contain the overall burden.

Stage III — Credit-impaired assets or NPAs. Banks recogniselifetime expected credit loss. Provisioning requirements here will also be higher than the current 15% mandate for sub-standard assets.

A critical shift: banks must now provide more for stressed loans before they cross the traditional 90-day overdue NPA threshold.

New NPA Classification Rules

The 90-day NPA classification period remains unchanged, but classification will now occur at the borrower level, not the account level. This means if one loan of a borrower turns bad, all loans of that borrower with the same bank may be treated as NPAs. Upgrading back to standard status requires the borrower to clear all liabilities, not just the defaulted account. This is expected to strengthen credit discipline and prevent selective repayment.

Additionally, the framework now extends provisioning to off-balance-sheet exposures and undisbursed credit limits — meaning banks must account for committed but yet-to-be-disbursed credit lines as well.

Impact on Banks

• Indian banks are well placed to absorb the transition, supported by a healthy CET-1 ratio of around 14% as of March 31, 2026, and steady profitability, with return on assets of about 1.25–1.3% in the last fiscal. Banks will be allowed to spread the transition impact over four financial years, reducing immediate pressure. Additional provisioning buffers already maintained by several lenders will further cushion the effect.
• However, the ECL regime will also lead to a structural rise in credit costs over time. Banks with higher exposure to microfinance, unsecured retail loans, and other riskier segments face greater pressure on margins. Some of these costs may eventually be passed on to borrowers. Banks will need to proactively focus on strengthening net interest margins and controlling operating expenses to absorb the long-term impact.
• Net NPA ratios for most major Indian banks currently stand below 1%, making this an opportune moment for the transition — the sector's strength reduces the risk of disruption.

Significance

The ECL framework marks a structural upgrade in how Indian banks manage credit risk. It enables earlier detection of stress, builds provisioning buffers in advance, reduces the chance of sudden shocks to balance sheets, and aligns India's banking norms with global standards (IFRS 9). For regulators, it improves transparency and accountability in credit risk assessment, making banking supervision more robust.