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Banks start making provisions ahead of RBI’s ECL norms

While the Reserve Bank of India (RBI) is yet to announce the final guidelines on the expected credit loss (ECL) based provisioning by banks, some lenders have started building up provisions even before migration to the new ECL regime.

Higher provisions are based on internal assessments done by these lenders on required loan-loss provisions under the proposed framework. However, a few lenders said they will start making provisions once the RBI releases the final ECL guidelines.

The country’s largest lender State Bank of India has said that it might require a provision of up to Rs 25,000 crore whenever the ECL framework is implemented. According to various estimates, the banking sector’s provisioning requirement for shifting to the ECL framework will be between Rs 90,000 crore to Rs 1 lakh crore.

In January this year, the RBI issued a discussion paper on the introduction of the ECL framework for provisioning by banks. It said the banks will be given one year after the final guidelines are released for implementation of the expected credit loss approach for loss provisioning.

Currently, under provisioning norms, banks are required to set aside funds to a prescribed percentage of their bad assets on an incurred loss approach, which means they need to provide for losses that have occurred or incurred.

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State-run Bank of Maharashtra (BOM) has made an additional provision of Rs 250 crore in the first quarter of FY2024 related to the ECL framework. In the post-Q1 results call with analysts, a senior BOM official said the bank is already holding over Rs 1,200 crore of Covid provisioning.

“We are already having a provision of around Rs 1,500 crore and will need Rs 2,000 to Rs 2,500 crore (for ECL provisioning),” the senior banker said.

Union Bank of India MD and CEO A Manimekhalai said that the bank has done a study on the impact of the proposed ECL framework and has taken measures to meet the requirement.

“From this (Q2 FY2024) quarter onwards, we will start doing a little bit more provisions towards the ECL impact. Even if the ECL framework comes (into effect) in March 2024, we will have 12-month time to work on that. We are fully geared up to meet the impact of the ECL,” Manimekhalai said after announcing the Q1 FY2024 results.

Bank of India’s Chief Risk Officer Pinapala Hari Kishan said certain clarifications from the RBI are awaited, and once that comes, the bank will start making provisions in a quarter or two.

As per BOI’s assessment, the incremental provision requirement for it is around Rs 15,000 crore under the ECL regime. However, the lender has made a sizable amount of provision outside the current incurred loss-based approach. Excluding those provisions, the impact of the ECL framework would be Rs 10,000 crore on the bank, Kishan said.

“We are awaiting the RBI’s final guidelines in the matter. Internally, we have made an assessment and we are very comfortable to move to an ECL framework of provision,” ICICI Bank’s Executive Director Sandeep Batra said after announcing the Q1FY2024 results.

Although the RBI has not given the timeline for when final guidelines on the ECL framework will be issued, rating agency ICRA, in its January 2023 report, said that the RBI may notify the final norms this fiscal for implementation from April 1, 2025. Under ECL, ‘financial assets’ are to be classified as Stage 1, 2 or 3, depending on their credit risk profile with Stage 2 and 3 loans having higher provisions based on the historical credit loss patterns observed by banks. “This will be in contrast to the existing approach of incurred loss provisioning, whereby step-up provisions are made based on the time the account has remained in the NPA category,” the ICRA report had said.

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While the RBI has proposed a maximum time frame of five years after the date of implementation for spreading out these provisions, ICRA expects some banks to raise external capital sooner to manage the impact of the transition in a better manner.

Last month, RBI Governor Shaktikanta Das said banks will be given sufficient time for implementation of the ECL norms. “The comments (on the discussion paper on the introduction of the ECL framework) have been received, they are under examination, and we will issue the circular. We are mindful of the fact that the banks will need some time to implement it,” he told reporters after announcing the June monetary policy.

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Das said that the RBI made an assessment on the additional capital requirements under the ECL framework and it is within manageable limits.

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