Shares of PSU banks declined on Tuesday, 28 April, after the Reserve Bank of India (RBI) reiterated its stance on transitioning to the expected credit loss (ECL)-based provisioning framework, rejecting industry requests for an extension.
The central bank on Monday made it clear that the new norms will be in effect from 1 April next year, offering no additional transition time to lenders.
The Nifty PSU Bank index fell nearly 2%, with all its constituents trading in the red. Bank of India, Union Bank of India, Punjab & Sind Bank and Canara Bank were the top index losers, falling more than 2% each.
State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Bank of Maharashtra, Indian Bank and UCO Bank also suffered losses.
What is the ECL framework?
The RBI has introduced a revised framework for asset classification, provisioning, and income recognition, anchored in a forward-looking ECL model.
These tighter norms will require banks to set aside higher provisions for potential losses across their loan portfolios, aligning domestic regulatory standards with global practices.
Under the new framework, loans will be categorised into three stages based on evolving credit risk, necessitating earlier recognition of stress. The shift to the ECL framework — first proposed by the RBI in early 2023 — is expected to increase provisioning requirements across the sector, thereby exerting pressure on profitability.
The key shift lies in the transition from an “incurred loss” model to a forward-looking ECL framework. Under this approach, banks will be required to recognise and provide for potential credit losses in advance, rather than waiting for a loan to become non-performing.
The framework introduces a three-stage asset classification system based on the extent of deterioration in credit risk:
Stage 1: Standard assets with no significant increase in credit risk; provisioning based on 12-month expected credit losses
Stage 2: Assets that have witnessed a significant increase in credit risk; provisioning based on lifetime expected credit losses
Stage 3: Credit-impaired assets; provisioning based on lifetime expected losses, with more stringent treatment
The RBI clarified that existing non-performing asset (NPA) classification norms will continue to apply, with loans being tagged as non-performing if repayments remain overdue for more than 90 days.
Impact on Banks
The implementation of the ECL norms will result in higher upfront provisioning, especially in unsecured retail, MSME and corporate exposures.
According to Nomura, the impact on PSU banks and mid-tier banks will be higher. Several PSU banks have highlighted that the one-time provisioning hit could impact net worth by 3%-9%.
Large private banks are better placed as the transition impact would be lower given provision buffers of ~2%–4% of net worth, Nomura said.
It expects PSU banks to face 55-130 bps CET-1 drag and 3-9% net worth erosion, while large private banks largely insulated. Here’s a look:
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