RBI Discussion Paper moots expected credit loss model for banks to address NPA

So, currently banks follow what is an incurred loss model where they make provisions only once repayments are delayed or not paid, but now, RBI proposes that banks start providing as soon as they start expecting any kind of loss or non-repayment.

Under this expected credit loss model, banks have to classify loans into three categories. Stage one will mostly be all standard assets, stage two will be loans that are seeing some signs of potential stress. And stage three can broadly be loans which are in default.

As far as the transition is concerned, comments are invited by the February 28 and then RBI will come out with final guidelines. But the impact will not be immediate because banks will get at least one year for implementation and a maximum period of five years to phase out the higher provisioning to avoid any capital shock.

RBI, in its own words, expects the potential initial impact of this to be significant and broadly, the sense is that provisions will rise.

CLSA, for instance, expects a limited impact on private banks but public banks will have to build their buffers. Macquarie believes the provisions could be high because the probability of default has been very high in the last five to 10 years. The impact will be felt starting FY26 for banks. Morgan Stanley believes the potential impact is going to be manageable with larger private banks better placed than others and Jefferies also holds a similar view.