RBI Adopts Revised Bank Loan-Loss Accounting Standards to Harmonize with International Norms

Reserve Bank of India Introduces Stricter Rules for Bank Loan Provisions

The Reserve Bank of India (RBI) has introduced tighter rules requiring banks to set aside more funds for future losses on credit and loan portfolios. This move aims to align the sector's norms with global standards.

Under the new norms, banks will be required to divide loans into three stages depending on future risk assessment on their portfolio. This is a shift towards an expected credit loss (ECL) framework, which the RBI had proposed in early 2023. As a result, banks across the board will have to set aside more capital for potential loan losses, leading to lower profits.

Lenders will continue to follow existing non-performing asset rules, where loans are classified as bad if repayments are overdue by 90 days. The new directions will come into effect from April next year.

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The RBI's decision follows a global trend, with both the International Accounting Standards Board and the US Financial Accounting Standards Board having adopted provisioning standards that require the use of ECL models. This approach is different from the "incurred loss" model, which requires banks to provide for losses that have already occurred.

The shift in norms is aimed at enhancing the resilience of the banking system, particularly at a time when global private credit risk is weighing on investor sentiment.