Reserve Bank of India’s ECL rules raise early-stress costs

Reserve Bank of India’s expected credit loss, or ECL, framework will raise the minimum provision on most loans overdue for 31 to 90 days to 5% from about 0.40% under current standard-asset norms from April 1, 2027. The largest transition effect is expected in these early-stress Stage 2 accounts, although the report does not identify any bank plan to sell them.

What do RBI’s ECL rules change for early-stress loans?

RBI’s ECL rules replace fixed incurred-loss provisioning with forward-looking loss estimates for covered banks and All India Financial Institutions from April 1, 2027. The framework applies to scheduled commercial banks, but excludes Small Finance Banks, Payments Banks, Regional Rural Banks and Local Area Banks. Existing Income Recognition, Asset Classification and Provisioning, or IRACP, norms remain effective until March 31, 2027.

Under ECL, banks must estimate provisions using probability of default, loss given default and exposure at default, while incorporating forward-looking macroeconomic scenarios. Probability of default measures the chance that a borrower will default, loss given default measures the expected loss after default, and exposure at default is the anticipated outstanding amount at default. RBI requires financial assets to be placed in three stages according to the change in credit risk since origination.

Stage 1 covers performing assets without a significant increase in credit risk and requires a 12-month ECL. Stage 2 covers assets with a significant increase in credit risk, broadly early delinquencies in the 31-to-90-day overdue range, and requires lifetime ECL. Stage 3 covers credit-impaired assets, including loans overdue by 90 days or more, and also requires lifetime ECL.

The 90-day overdue test for a non-performing asset, or NPA, does not change. For non-agricultural loans, a Special Mention Account, or SMA, is classified as SMA-0 when overdue for up to 30 days, SMA-1 when overdue for more than 30 to 60 days, and SMA-2 when overdue for more than 60 to 90 days. These SMA-1 and SMA-2 accounts broadly correspond with the early-stress category that drives the reported ECL transition effect.

How much additional provision do RBI’s ECL rules require?

RBI’s ECL rules create an incremental minimum provision of 4.6 percentage points for most Stage 2 assets, increasing the charge from about 0.4% under standard-asset norms to 5%. CRISIL Ratings identifies Stage 2 as the main source of transition impact because it includes loans showing increased credit risk before they become NPAs.

The effect is concentrated rather than universal because SMA-1 and SMA-2 accounts represent about 2% to 2.2% of total banking exposure. The ultimate provision can exceed the regulatory floor because banks must use their own risk estimates, portfolio composition, asset-quality experience and macroeconomic assumptions. The 5% figure is therefore a prudential minimum, not a cap on ECL expense.

CRISIL Ratings estimates that the gross transition effect could reduce banks’ Common Equity Tier 1, or CET-1, capital ratios by up to 170 basis points. The net effect, after existing provisions and contingency buffers, is estimated at up to 120 basis points. RBI permits banks to spread that net transition impact across four financial years from April 1, 2027 to March 31, 2031.

The banking system’s estimated CET-1 ratio was about 14% as of March 31, 2026. CRISIL Ratings assessed that capital level as sufficient to absorb the transition without a material change to bank credit profiles. The reported effect can nevertheless differ among banks because the ECL calculation depends on the type of loans held, their delinquency history and provisions already carried.

Which early-stress loans face a 5% ECL floor?

Most early-stress retail, corporate and business loans face a 5% Stage 2 floor under RBI’s ECL rules, while specified secured and public-sector exposures have lower minima. The 5% floor applies to secured retail loans, corporate loans, small and micro enterprise loans, medium enterprise loans, farm credit, loans to banks, non-banking financial companies and financial institutions, and loan products not separately listed.

The product-specific design means that a 31-to-90-day overdue account does not always carry a 5% provision. Gold loans have a 1.5% Stage 2 floor, individual housing loans have a 1.5% floor, and direct exposures to state governments or state-guaranteed exposures have a 2.5% floor. Loans secured against term deposits, Life Insurance Corporation policies or Kisan Vikas Patra have a 0.4% Stage 2 floor.

Restructured standard advances have a 10% Stage 2 floor, compared with 5% for most other categories. Certain commercial real estate and project-finance categories also have separate floors and additional account-specific provisions where the date of commencement of commercial operations is deferred. Those distinctions mean the provision outcome depends on the product classification and the credit event, not only on days overdue.

Stage 3 creates a smaller reported incremental transition effect because current NPA provisioning is already about 76%. For several specified Stage 3 categories, the secured portion has a floor of 25% in the first year, rising to 100% after four years, while unsecured portions require 40% in the first year and 100% after one year. The contrast with Stage 2 explains why the reported additional cost is concentrated in loans that have not yet crossed the 90-day NPA threshold.

Will RBI’s ECL rules create an ARC acquisition pipeline?

The report does not establish that RBI’s ECL rules will cause banks to sell Stage 2 loans or create a defined acquisition pipeline for asset reconstruction companies, or ARCs. It supports a narrower conclusion: a 5% minimum provision on many early-stress loans can affect how lenders assess collection, restructuring, retention or transfer options before the April 2027 transition. RBI had 27 registered ARCs as of December 31, 2025.

The possible relevance to ARCs arises from the scale of retail lending rather than from a disclosed transfer programme. Retail credit stood at Rs 76 lakh crore as of March 31, 2025 and represented 35% of systemic credit in fiscal 2025, compared with 25% in fiscal 2019. CRISIL Intelligence projects retail credit to grow at a 14% to 15% compound annual growth rate between fiscal 2025 and fiscal 2028.

Asset-quality data provide a separate context but do not quantify potential Stage 2 sales. Scheduled commercial banks’ gross NPA ratio declined from 9.1% in fiscal 2019 to 1.8% as of March 31, 2026, while RBI’s baseline stress-test scenario projects 1.9% by March 31, 2028. Those measures concern assets that have crossed the NPA threshold, rather than loans overdue for 31 to 90 days.

For 174 non-government non-banking financial companies with about Rs 34.5 lakh crore of loans as of March 2026, RBI’s baseline scenario projects a gross NPA ratio of 2.8% by the end of fiscal 2027, from 2.4% in fiscal 2026. The sample represented about 95% of non-government NBFC advances. These projections may indicate changing asset-quality conditions, but they do not identify a volume, value or timing of loan transfers to ARCs.

Conclusion

RBI’s ECL framework changes the economics of early loan stress by requiring a 5% minimum Stage 2 provision for most affected categories, compared with about 0.4% under the current standard-asset approach. The system-wide exposure is limited by SMA-1 and SMA-2 accounts representing about 2% to 2.2% of banking exposure, but the effect can vary materially by lender and portfolio.

The next measure to watch is banks’ implementation of ECL models and RBI’s permitted four-year transition period ending March 31, 2031. Portfolio composition, credit-risk assessment, existing provisions and macroeconomic scenarios will determine the final charge, while any loan-sale programme or ARC acquisition strategy remains undisclosed in the report.