The Reserve Bank of India (RBI) on Friday said that it is considering new provisioning guidelines for banks, which will require lenders to provide for loans on the basis of an expected credit loss (ECL) approach, against the current incurred loss approach.
The RBI will soon issue a discussion paper on proposed norms on various aspects of transitioning to the new system, the central bank said in a statement, as a part of additional measures after the monetary policy decision.
The limitations of the incurred loss approach were highlighted after the financial crisis of 2008, and one of the response to these findings was a shift to expected credit loss, the RBI said.
“As a further step towards converging with globally accepted prudential norms, it is proposed to adopt the expected loss approach for loss allowances required to be maintained by banks in respect of their exposures,” the central bank said.
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RBI deputy governor M Rajeshwar Rao in June said that a loan default is an indicator of stress, and banks should make provisions before such defaults, while adding that the central bank is considering introducing these norms. As of now, bigger non-banking financial companies (NBFCs) are required to consider the credit loss provision on a forward-looking basis.
Separately, the RBI has proposed to apply the current regulations for online payment aggregators to offline entities as well. The current regulations, introduced in March 2020, require online payment aggregators to maintain certain capital requirements, mechanism to prevent frauds, and management of settlement and escrow accounts.
“Keeping in view the similar nature of activities undertaken by online and offline PAs, it is proposed to apply the current regulations to offline PAs as well,” the central bank said.
The move will aid in ensuring oversight on merchant discount rates (MDRs), improving consumers’ dispute-resolution processes and normalising the digital payment experience, Muralidharan Srinivasan, head of payments of APMEA region, at US-based fintech firm FIS, said. Additionally, the decision will lead to convergence on standards of data collection and storage, at a time when card and UPI payments are on the rise, Dewang Neralla, CEO of payments startup NTT DATA Payment Services India, said.
Lastly, the RBI will also introduce a framework for securitisation of stressed assets, similar to the framework for standard assets. The central bank will issue a discussion paper on the proposed framework, inviting comments on certain aspects. Currently, securitisation of non-performing assets is done under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, through asset reconstruction companies.