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Banks with higher share of restructured loans, 60-plus-days past due (dpd) loans and off-balance sheet exposures will see higher impact when the expected credit loss (ECL)-based loss provisioning framework is implemented, according to ICRA.
It further said the banks with lower capital cushions would need to raise capital to manage transition to the ECL framework.
The RBI has sought feedback on its recent discussion paper on the implementation of the ECL-based loss provisioning by banks from various stakeholders, prior to the issuance of the guidelines.
The credit rating agency expects this to be an important step towards their eventual shift to the Indian Accounting Standards (IND-AS) regime. The agency’s discussions with banks indicate that the transitioning impact to IND-AS could be as high as up to 300-400 basis points, including the provisioning for ECL.
The improvement in the financial metrics should help most banks transition smoothly to the new framework, ICRA said in a note.
“Under ECL, ‘financial assets’ are to be classified as stage-1, 2 or 3, depending on their credit risk profile with stage-2 and 3 loans having higher provisions based on the historical credit loss patterns observed by banks. This will be in contrast to the existing approach of incurred loss provisioning, whereby step-up provisions are made based on the time the account has remained in the NPA category,” per the note.
The agency assessed that shifting to ECL-based provisioning would entail a one-time provisioning requirement on such stage-2 and 3 exposures apart from other off-balance sheet exposures.
While the RBI has proposed a maximum time frame of five years after the date of implementation for spreading out these provisions, ICRA expects some banks to raise external capital sooner to manage the impact of the transition in a better manner.
The discussion paper has proposed a relaxed classification of 60-plus dpd standard loans as a part of stage 2 loans (30-plus dpd followed by most non-banks at present) and also asked banks to carry ECL provisions on off-balance sheet exposures, including undisbursed credit lines.
While the overall ECL provisions will be based on the historical loss patterns observed by banks, the RBI will also specify a minimum floor.
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