The proposed expected credit loss (ECL) framework would shift banks from the traditional ‘incurred loss’ approach to a predictive framework. Given the slightly higher floors than the current norms, the overall provisioning requirement is set to increase from the current level. Nevertheless, the improvement in asset quality in the recent past would lessen the impact compared to the impact had the norms been implemented a few years ago.

• The Reserve Bank of India (RBI) released a draft circular - Reserve Bank of India (Scheduled Commercial Banks - Asset Classification, Provisioning and Income Recognition) Directions, 2025 - on October 7, 2025. Principally, the overdue ageing-based classification* will get replaced with a forward-looking, risk-based model (Stage 1: Low risk, Stage 2: Significant increase in credit risk (SICR), and Stage 3: Credit-impaired).
• The proposed expected credit loss (ECL) framework would shift banks from the traditional ‘incurred loss’ approach to a predictive framework and is a step in direction towards Ind-AS implementation. Banks must now estimate losses based on probability of default (PD), loss given default (LGD), and exposure at default (EAD). This allows for early recognition of credit deterioration, improving the risk visibility and enabling proactive portfolio management.