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The Reserve Bank of India has decided to constitute an external working group on expected credit loss (ECL) based framework for provisioning by Banks to get independent inputs on some of the technical aspects having a bearing on the significant transition involved.
The ECL approach to provisioning is a paradigm shift from the current incurred loss-based provisioning regime.
Classifying financial assets
The key requirement under the proposed ECL based Framework for Provisioning shall be for the banks to classify financial assets (primarily loans, including irrevocable loan commitments, and investments classified as held-to-maturity or available-for-sale) into one of the three categories - Stage 1, Stage 2 and Stage 3.
The classification will depend upon the assessed credit losses on them, at the time of initial recognition as well as on each subsequent reporting date and make necessary provisions.
The Working Group will be chaired by R Narayanaswamy, former Professor, IIM Bangalore and will consist of eight members - domain experts from academia and industry as well as representatives from select banks
The Terms of Reference for the Working Group include delineating the principles that will be required to be considered by banks while designing the credit risk models to be used for assessing and measuring expected credit losses and recommending factors that banks should consider for the determination of credit risk based on the guidance provided in IFRS (International Financial Reporting Standard) 9 and principles laid out by Basel Committee on Banking Supervision (BCBS).
Group functions
The group will suggest the methodology to be used for undertaking external independent validation of the models and recommend, based on comprehensive data analysis, prudential floors for provisioning.
The recommendations of the working group would be duly factored in while framing the draft guidelines, which shall be put in the public domain for comments before issue of final guidelines, RBI said.
“Several comments have been received from various stakeholders on the issues flagged in the Discussion Paper, which are being examined by the Reserve Bank. While the regulatory stance to be taken in respect of each of the issues shall be examined by the Reserve Bank, it has been decided to constitute a Working Group,” the central bank said.
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