Banks seek one more year to prepare for ECL reporting on stressed assets

Banking regulator has indicated five-year glide path for shift to new system

Banks have sought one more year from the Reserve Bank of India (RBI) to develop risk models, gather data and test before the Expected Credit Loss (ECL) regime for stressed asset provision begins on April 1, 2025.

Senior bank executives said technical capacity building will include systems and skills development. While internal work has begun on developing models with the help of experts, it is going to take more time for gathering data and assessing impact while transitioning from the Incurred Loss Approach banks use now.

Banks, given their robust bottom line, can absorb any financial burden for the transition to ECL over a period, said the exe. The RBI has indicated a five-year glide path for a complete shift to ECL.

Large banks have methodically built capacity for assessing and providing for operational risks. Small banks, however, use broad-based criteria for setting aside money (provision) for operation risk as per cent of net worth or net profit, said the executives.

The ECL provisioning will be an outcome of banks own historical data on probability of default (PD) and loss given default (LGD). These estimates may differ initially for various banks with varying degrees of impact.

According to rating agency ICRA, banks have for the last few years been preparing their financials as per IND-AS (Indian Accounting Standards) and submitting to RBI. Some banks in industry discussions have indicated that the impact on core capital, including ECL loss provisions, to be as high as 300-400 basis points.

Banks operating with a higher share of unsecured advances may require high provisioning. The recent corporate non-performing assets (NPA) cycle had high LGD. Hence, ECL provision based on the recent past could be a challenge, ICRA said.

ECL framework addresses key factors while transitioning to IND-AS. However, mark-to-market on Held to Maturity (HTM) investments will be another area to look at while eventually shifting to IND-AS.