Banks will have adequate time and financial strength to absorb the impact of transition to expected credit loss regime, credit rating agency India Ratings and Research said in a press release on Wednesday.
Banks will be aided by benign credit conditions, high provisions on legacy gross non-performing assets, adequately capitalised balance sheets, adoption of better systems and processes for credit delivery, especially with public sector banks, the credit rating agency said.
In January, The Reserve Bank of India (RBI) proposed to move the banking system to an expected credit loss-based provisioning approach from an “incurred loss” approach.
Under the expected credit loss (ECL) framework, the provisioning will be higher for micro, small, and medium-sized enterprises (MSMEs) and agriculture segments across banks, according to ratings agency.
While there is unlikely to be any incremental capital requirements for banks in the transition to the ECL model, they should be given a judicious transitory period to ensure smooth transition.
“One of the key challenges will be implementing such a model, along with back testing for banks that may not have a database ecosystem. An intense debate within the banking industry is likely to take place regarding the applicability of portfolio behaviour to large and mid-corporate segments,” the credit rating agency said.