The Reserve Bank of India’s (RBI) committee, led by R Narayanaswamy, an ex-professor from IIM Bangalore and comprising domain experts, is working to recommend changes to the Expected Credit Loss (ECL) framework. The goal is to transition from the current loss-based model to a system that recognizes stresses early. This initiative, announced on Wednesday, follows a discussion paper issued by the RBI on January 16, 2023.
The committee’s recommendations will adhere to the International Financial Reporting Standards (IFRS) 9 and Basel Committee on Banking Supervision (BCBS) guidelines. These principles will aid banks in crafting their own credit risk models. Additionally, the panel will suggest methods for external independent validation and prudential floors for provisioning.
Their input will significantly influence the RBI’s draft guidelines, which will be open for public feedback before finalization. The RBI is currently evaluating stakeholders’ comments on regulatory stances following its January discussion paper.
Analysts predict that the shift to the new ECL model could result in a 200 basis points impact on the common equity tier 1 capital of 46 banks. This core capital serves as a key measure of a bank’s financial strength from a regulator’s point of view.
The committee’s recommendations are expected to provide a comprehensive overview of regulatory adjustments needed for the banking sector. Further details about this development can be found on Zeebiz.com.
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