Expected Credit Loss (ECL)

On 27 April 2026, the Reserve Bank of India issued the final directions on Expected Credit Loss (ECL), along with a Statement on Feedback Received from stakeholders. These were issued following the draft directions released for public consultation on 7 October 2025 and subsequent internal deliberations by the RBI. The final directions incorporate select changes and provide additional clarifications vis‑à‑vis the draft, including on the application of prudential floors, ECL computation for purchased or originated credit‑impaired (POCI) assets, and the determination of the effective interest rate (EIR), reflecting a calibrated refinement in the final directions.

These directions will be applicable for commercial banks (excluding small finance banks (SFBs), payments banks and local area banks), corresponding new banks and the State Bank of India (SBI). These directions shall come into effect from 1 April 2027.

In its directions, the RBI mandates banks to develop a forward looking ECL framework that compels banks to recognise credit stress at an early stage – well before it crystallises into non-performing status. In our view, the final directions will enable banks to better capture emerging borrower vulnerabilities and change in market dynamics to protect impact on bank capital than the existing provisioning approaches.

Key components that are to be considered while formulating ECL framework within their organisations:

Default/NPA classification
Transition arrangements
Significant increase in credit risk (SICR)
Prudential floors for ECL
Model risk management (MRM)

Governance, automation and control
Disclosures, transition and reporting
Potential implementation challenges
Modelling requirements for ECL components (segmentation, probability of default, loss given default, exposure at default, forward looking indicator, effective interest rate)

Directions introduce a structured approach to governance in ECL computation and reporting. It categorically requires active oversight from the board of directors, supported by a designated subcommittee or board approved committee. Approved committee should include the CFO, CRO, and other relevant members.

To successfully implement the RBI’s ECL framework, banks must prioritise strengthening their data infrastructure, ensuring availability, quality, and integration across systems. Building robust internal models for PD, LGD, and EAD with forward looking macroeconomic inputs is essential, supported by a strong governance framework involving board level oversight and a dedicated subcommittee.