NAVIGATING THE ECL TRANSITION
A Strategic Roadmap for Indian Banks Amid Evolving Regulatory Paradigms
The Reserve Bank of India (RBI) has been actively implementing new guidelines to make certain that the Indian banking industry continues to be resilient
and competitive on the global stage while also being robust financially. In January 2023, RBI published a discussion paper that signaled a move to a new
ECL (Expected Credit Loss) framework for provisioning which indicated a significant change in risk management strategies. However, recently, the RBI has
seemed to have adopted an accommodative stance around proposed regulatory changes, including the ECL framework for provisioning by banks. This
measured approach underscores the RBI’s balancing act between stability and growth, recognizing that regulatory reforms involve trade-offs. The central
bank aims to strengthen the banking system without stifling credit growth or economic efficiency.
STABILITY VS. GROWTH
The Balance
The RBI’s stance on ECL provisioning and adoption of IFRS 9 principles is indicative of a turning point for Indian banks. The RBI indicated that while the
proposed regulatory changes aim to strengthen the risk management framework in banks and ensure that the regulated entities are financially and
operationally resilient, there is a cost to implementing these regulations, which needs to be weighed against achieving economic growth and efficiency.
KEY IMPACT OF ECL ON THE BANKING SECTOR
While most of the banks have done significant work in the last few years to develop the ECL models and strengthen the overall model risk management
framework, however, the final shift from the Incurred Loss Model to ECL-based provisioning will redefine risk management and financial reporting in
Indian banking:
Variability in provisioning
Although the ECL standards apply uniformly across the industry, there are varied practices adopted by the banks while developing ECL models (modelling
practices, inherent assumptions, data availability, overlays, etc.) that might result in different outcomes even for the similar loan portfolios. These varying
approaches and practices underscore the importance of the need for robust governance, transparent disclosures, and effective oversight
Higher Capital & Compliance Costs
While provisioning for credit risk may impact profitability in the short-run, it is expected to bolster resilience in the long-run
Data & Technology-Driven Risk Management
There is a shift towards digitalization in risk assessment due to the need for sophisticated credit risk modeling, stress testing, and analytics
Increased Earnings Volatility
ECL provisions fluctuate with credit risk, leading to greater earnings volatility, especially during economic downturns.
LONG-TERM BENEFITS OF ECL IMPLEMENTATION
While the challenges are plenty, this framework is bound to change Indian banking for the better:
THE IFRS 9 MANDATE:
IMF’s Global Benchmarking vs. RBI’s Pragmatism
The IMF, in its latest Financial System Stability Assessment (FSSA) report published by RBI on March 25, 2025, acknowledged India’s robust economic
recovery and effective regulatory measures, especially in the Non-Banking Financial Companies (NBFCs) sector. Nevertheless, the IMF emphasized the
need for quicker adoption of IFRS 9 (ECL) standards, citing:
- Cross-border comparability for foreign investors.
- Reduced arbitrage between Indian GAAP and global accounting standards.
Thus, a nuanced approach emerges: while the IMF is prompting for quick adoption of IFRS 9 to align with global standards, the RBI prefers a calibrated
approach and phased implementation strategy balancing the stability and growth of the economy.
RBI’s calibrated response demonstrates strategic sovereignty:
- Phasing aligns with domestic banks’ readiness (e.g., PSBs vs. tech-forward private banks).
- Parallel reforms (e.g., PCA framework tweaks) ensure ECL synergizes with broader stability goals.
FINAL THOUGHTS
A Defining Moment for Indian Banks
Given the range of factors at play, including varying levels of preparedness among banks, the broader economic context, the IMF’s push for IFRS 9
adoption, and the RBI’s calibrated stance, it will be important to observe how this transition evolves. The RBI’s efforts to strike a balance between financial
stability and operational efficiency are likely to play a pivotal role in shaping the future of India’s banking landscape over the coming years.
