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      On 7th October 2025, the Reserve Bank of India (RBI) proposed a transformative shift in the provisioning requirements by issuing a draft Directions on Asset Classification, Provisioning and Income Recognition. In this, RBI has proposed a comprehensive overhaul of the existing IRACP (Income Recognition, Asset Classification and Provisioning) norms by introducing a forward-looking Expected Credit Loss (ECL) framework governing Scheduled Commercial Banks (SCBs) (excluding Regional Rural Banks (RRBs), Small Finance Banks (SFBs), and Payments Banks) and All India Financial Institutions (AIFIs). This addresses the limitations of the current incurred Loss model under IRACP norms which recognises credit losses only after a default event, often resulting in delayed provisioning and underestimation of credit risk. These directions shall come into effect from 1st April 2027. The ECL framework mandates banks to compute probability-weighted Expected Credit Loss across multiple macroeconomic scenarios, ensuring forward-looking provisioning with product based prudential floors prescribed for Stage 1 and Stage 2. Additionally, for Stage 3 accounts, provisioning floors are based on product type and duration of default. 

      Key highlights of the report:

      • Significant increase in credit risk

        Banks are required to assess SICR at each reporting date using documented criteria such as days past due, credit rating downgrades, increased loan pricing, or macroeconomic deterioration and other forward-looking factors

      • Modelling requirements for ECL components

        ECL will be based on three key components – Segmentation, Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD) – and must incorporate forward-looking macroeconomic scenarios 

      • Model risk management

        A robust Model risk management (MRM) framework under the draft guidelines is structured around a three-line-of defense model

      • Governance and control

        Draft guidelines introduce a structured approach to governance in Expected Credit Loss (ECL) computation and reporting. They require active oversight from the Board of Directors, supported by a designated subcommittee or board-approved committee.

      Expected Credit Loss (ECL)

      The framework aims to enhance the accuracy, transparency, and timeliness of expected credit loss recognition, thereby improving the resilience of the Indian banking system

      Download the report (1.55 MB)

      Key Contact

      Rajosik Banerjee
      Rajosik Banerjee

      Partner and Deputy Head, Risk Advisory and Head Financial Risk Management

      KPMG in India

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