By Dhruv Parikh & Priyanka Shetty, Respectively Partner and Director, Financial Services Risk Consulting, EY India
Close on the heels of the Monetary Policy Committee’s announcement on October 1 to implement the expected credit loss (ECL) framework by fiscal year 2027 for banks, draft guidelines detailing the proposed ECL methodology were issued on October 7. This initiative is more than a regulatory update; it signifies a strategic evolution in how Indian banks assess, manage, and communicate credit risk. By adopting a forward-looking expected loss approach aligned with global standards, Indian banks would position themselves for greater resilience, transparency, and agility in a dynamic economic environment.
Globally, the transition to International Financial Reporting Standard 9 has transformed banking landscapes, with lenders reporting significant increases in provisions—ranging from 20% to 50%—and declines in capital ratios such as the Common Equity Tier 1 (CET1) by 0.06% to 1.36%. These changes have prompted financial institutions to rethink credit strategy, portfolio management, and risk governance. For India, the upcoming ECL framework presents an opportunity to modernise credit risk management while reinforcing market confidence in the banking system.
The Reserve Bank of India’s (RBI) framework emphasises a forward-looking, data-driven approach, requiring banks to integrate insights from credit, business, and finance functions. It calls for scenario-based modelling to anticipate potential credit losses, moving beyond reliance on historical performance. Additionally, the RBI has set product/portfolio-wise prudential floors and it allows banks to phase in the transition impact until March 31, 2031.
Successful adoption of ECL hinges on five strategic dimensions.
Accuracy and relevance of data: The statistical nature of ECL computation necessitates robust models and high-quality data. Reliable provisioning begins with accurate information, requiring strong governance and ongoing controls aligned with leading data standards like BCBS 239. Ensuring data integrity allows banks to trust their models and incorporate insights confidently into credit strategy.
Portfolio segmentation stability: Given the RBI’s approach, effective segmentation for modelling and ECL reporting will be crucial. Portfolio segmentation stability ensures that evolving customer and market dynamics are accurately reflected in credit assessments. Continuous monitoring of segments will maintain reliable, forward-looking estimates, forming a strong foundation for strategic planning.
Modelling methodology: Methodology choices and assumptions must be grounded in strong statistical principles while capturing business drivers and environmental factors. The framework for identifying significant increases in credit risk, which drives staging, should be data-driven.
Accuracy of ECL estimates: Implementing accurate ECL estimates is critical. The RBI mandates a robust model risk management framework, with back-testing and validation ensuring that provisions reflect true credit risk—avoiding unnecessary capital over-allocation or underestimating potential losses.
Explainability of ECL movements: Forward-looking provisions may introduce volatility in reported earnings. Clear communication about ECL movements—such as why provisions change and how they are derived—is essential. Transparent modelling outputs will strengthen stakeholder confidence and maintain credibility in reporting.
A strong governance framework involving all stakeholders is vital for the successful implementation and ongoing management of ECL.
The ECL framework also positions Indian banks to capitalise on long-term growth opportunities. By adopting a forward-looking lens, institutions can identify emerging trends in credit demand, tailor risk strategies to sector-specific dynamics, and deploy capital more effectively. This framework enhances comparability with global peers, reinforcing India’s credibility in international financial markets.
Ultimately, ECL represents a strategic inflection point. By embracing technology, robust analytics, and cross-functional collaboration, banks can transform provisioning from a technical exercise into a lever for growth, resilience, and stakeholder trust.
As India’s financial sector evolves, this shift underscores a broader message: proactive, data-driven decision-making supported by sound governance is central to modern banking. The ECL framework exemplifies this approach, paving the way for Indian banks to enhance transparency, strengthen capital discipline, and drive sustainable performance.
In the coming years, as ECL is adopted across the banking system, it will likely redefine industry standards for credit risk management, investor communication, and financial strategy. Indian banks now have the opportunity to not only meet regulatory expectations but also lead in demonstrating how forward-looking, strategic provisioning can serve as a foundation for growth, stability, and innovation.
In conclusion, the RBI has chosen an opportune moment for this framework’s adoption. The recent Financial Stability Report indicates that scheduled commercial banks have achieved a historic capital adequacy ratio of 17.3%, supported by low levels of non-performing assets and strong earnings, validating the industry’s capacity to absorb the transition impact through to March 31, 2031.