Banks request RBI for more time to implement new loan provisioning norms
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In January this year, the RBI came out with a draft guidelines proposing adoption of expected credit loss approach for credit impairment. It said the banks will be given a one year period after the final guidelines are released for implementation of expected credit loss approach for loss provisioning.
Though the RBI is yet to announce the final guidelines on ECL norms, some of the rating agencies have said that final norms on this may be notified by FY2024 for implementation from April 1, 2025.
“We have requested the regulator to allow us a little more time to prepare ourselves for this,” Indian Banks Association (IBA) Chief Executive Sunil Mehta told reporters on the sidelines of a Fintech event on Tuesday. “We have requested them (the RBI) for one more year,” Mehta said, when asked about the exact time lenders have requested the RBI.
He, however, said that in the “worst case scenario”, the banking system is gearing up for the switch to the new system. “… the banking sector is already geared up, few of the banks have already developed their systems (and) have got their data in place on which they can design their ECL-based risk models,” he added. Currently, banks are required to make loan loss provisions based on an “incurred loss” approach. This means that loan loss provisioning happens much later, which can lead to an increase in credit risk for banks.
Under the ECL norms, banks will be required to classify financial assets (primarily loans, including irrevocable loan commitments, and investments classified as held-to-maturity or available-for-sale) into one of the three categories – Stage 1, Stage 2, and Stage 3, depending upon the assessed credit losses on them, at the time of initial recognition as well as on each subsequent reporting date and make necessary provisions.
The RBI also proposed to introduce a transitional arrangement for introduction of ECL norms in order to avoid a capital shock.
While talking to reporters during the fourth quarter results press conference on Tuesday, Bank of Baroda Managing Director and CEO Sanjiv Chadha said his bank will be able to absorb any ECL provisions within a normalised credit cost.
“It means that the trajectory of improvement which we have seen in the bank’s profit should not get impacted by the introduction of ECL norms because the RBI also said that it will be implemented over a period of time,” he said.
(With inputs from PTI)
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