Canara Bank and Other PSU Bank Shares Decline Amid RBI's Finalisation of ECL Norms

RBI Declines Pleas for More Time to Implement Expected Credit Loss (ECL)-Based Provisioning

The Reserve Bank of India (RBI) has declined pleas for more time to transition to the expected credit loss (ECL)-based provisioning, making it clear that the newer system will be implemented from April 1, 2027. As a result, shares of Bank of India, Union Bank of India, and other public sector unit (PSU) banks fell up to 2.5% on April 28.

According to the RBI's "Directions on Asset Classification, Provisioning, and Income Recognition for Commercial Banks," which was first issued on October 7, 2025, banks had sought more time for the transition as they need to build databases and models, and upgrade systems. However, the RBI stated that banks have been provided a one-year timeline to prepare their internal systems for implementation of the new framework.

Under the current system, banks make a provision against an asset once the loss is incurred, whereas under ECL, they will move to a more proactive system. This is expected to increase provisions in the banking system. The RBI has provided some measures to ease the transition to ECL, including a calibrated transition framework, transitional arrangements for one-time capital impact on account of ECL transition, a three-year timeline for application of Effective Interest Rate (EIR) on legacy loan accounts, and guidance provided on key implementation issues.

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The RBI's final asset-classification and provisioning rules are expected to raise provisioning requirements for state-owned banks, according to Macquarie. The RBI has also not accepted feedback to omit a reference to non-performing assets (NPAs) as non-feasible, stating that NPA classification is an objective and well-established framework that is widely understood and recognized by stakeholders.

The RBI received feedback wherein detailed guidance was sought to implement the framework, but declined the same stating that ECL is inherently principle-based and requires institution-specific risk assessment. However, the RBI has accepted or partially accepted feedback on some of the suggestions first proposed in the draft, making necessary changes in the final directions.

Some of the key changes include maintaining the floor for individual housing loans under Stage 1 at par with the existing standard asset provisioning but reducing the same to 0.25%, creating a separate floor category for direct lending to state government and specific state government-guaranteed exposures, and prescribing a Stage 2 Floor at 2.5% as per the feedback received. Additionally, the RBI has clarified that Purchased or Originated Credit Impaired Assets (POCI) shall be treated as a separate category with recognition of lifetime ECL.

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