RBI's Credit Provision Norms to Have Up to 120 bps One-Time Impact on Banks' CET-1 Ratio: Crisil

Reserve Bank of India's New Credit Loss Norms to Impact Domestic Banks

The Reserve Bank of India's (RBI) new expected credit loss (ECL) norms for domestic banks are likely to have a one-time impact on their capital adequacy ratios by at least 120 basis points (bps), with a gross impact of 170 bps, according to credit-ratings agency Crisil.

The RBI introduced a three-stage classification structure for provisioning based on probability of default (PD), loss given default (LGD) and exposure at default (EAD). These guidelines, which were first introduced for stakeholder feedback in October, will now come into effect from April 1, 2027. Banks are now required to make provisions based on potential losses, rather than waiting for defaults to happen.

Crisil Estimates the Impact of New ECL Norms

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The credit agency estimates that the gross impact on the Common Equity Tier 1 (CET-1) ratio is expected to be up to 170 bps for most banks, varying based on portfolio composition. However, the net impact, factoring in provisions made till date, is expected to be significantly lower at up to 120 bps. This is because banks can spread out the impact across four quarters until next year, while additional advance provisioning can also reduce the impact.

Higher Provisions Expected

Banks are expected to hold higher provisions, particularly for stage 2, as the increment from the current requirement is as much as 4.6 percentage points for most categories of assets. This is because banks will have to provide more for incremental stage three assets compared with the current 15% mandate for sub-standard assets. Additionally, provisions will be higher even for delinquent assets that haven't yet reached stage three.

Banks Well-Positioned to Absorb the Impact

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The agency also said that banks are well-positioned to absorb the overall impact of the transition to the ECL regime, with capital buffers healthy as reflected in the estimated banking system CET-1 ratio of about 14 per cent as on March 31, 2026. Credit profiles of banks are unlikely to be affected, given healthy capitalisation buffers, Crisil said.

Comparison of Expected Credit Loss Norms