RBI Forms Working Group for Credit Loss-Based Provisioning Transition
A nine-person working group has been formed by the Reserve Bank of India (RBI) to develop a framework for an easier transition to the expected credit loss-based provisioning system (ECL). Bankers and business professionals will be part of the team, which will be overseen by R. Narayanaswamy, a former IIM Bangalore professor. A change from the current incurred loss-based provisioning paradigm is represented by ECL provisioning.
Technical Aspects and the Effect on Profit
- The technical aspects of switching to an ECL-based provisioning system will be discussed by the working group.
- Concerns have been raised regarding how this new system may affect the reported earnings of banks.
- Although ECL-based provisions may have a significant impact on some banks, India Ratings and Research noted that their strong operating buffers, low incremental credit costs, high provision coverage ratio, and the potential to postpone additional provisioning requirements for several years give them comfort.
Public feedback and global standards
- In order to get feedback from interested parties on the plan, the RBI had published a discussion paper in January. The central bank is right now reviewing the feedback. When drafting draft guidelines, it plans to take the working group's recommendations into account.
- Before releasing the last set of rules, the RBI will also ask the public for feedback. Based on recommendations from IFRS 9 and BCBS's guiding principles, the working group will offer variables for banks to take into account when calculating credit risk. Additionally, it will suggest prudential floors for provisioning.
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