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Expected credit loss explained: how the RBI's new rules will change the way banks provision for bad loans
The Reserve Bank is meeting bank chiefs on the expected credit loss framework that starts on April 1, 2027, and State Bank of India alone puts the one-time hit at ₹19,500 crore. What changes, why banks are worried, and what it means for borrowers.
The short answer
Expected credit loss (ECL) is a way of setting aside money for loans before they go bad. Today Indian banks provide mainly after a borrower has stopped paying. From April 1, 2027, under the RBI's directions of April 27, 2026, they must estimate losses in advance, loan by loan, and provide for them from day one. The one-time cost is large, with public sector banks estimating ₹3,000 crore to ₹19,500 crore each, but the RBI lets banks spread the capital impact over four years.
What is expected credit loss?
It is a rule that makes a bank set money aside for a loan before the borrower stops paying.
Think of a bank that has lent ₹100 crore to many borrowers. Experience says some of them will not repay. Under today’s system, which accountants call “incurred loss”, the bank mostly makes provisions once a loan shows signs of default. Under expected credit loss, or ECL, the bank must estimate in advance how much it is likely to lose and provide for that from the day the loan is made.
The Reserve Bank of India issued its final ECL directions on April 27, 2026, for scheduled commercial banks. They take effect on April 1, 2027. Small finance banks, payments banks and regional rural banks are outside them.
How does it work?
Every loan is placed in one of three stages, and the stage decides how much the bank must set aside.
Stage 1 holds loans whose credit risk has not risen significantly. The bank provides for the losses it expects over the next 12 months. Stage 2 holds loans where the risk has risen significantly, and Stage 3 holds credit-impaired loans. For both, the bank must provide for losses over the whole life of the loan. A loan 30 days overdue is presumed to have seen a significant rise in risk, according to published analysis of the directions.
The expected loss is worked out from three estimates: the chance the borrower defaults, how much of the loan would be lost if that happens, and the amount outstanding at that point. Banks must weigh these across several economic scenarios, and they need independent validation of their models and enough historical loss data. The 90-day overdue test for calling a loan a non-performing asset stays as it is.
Old and new provisioning
What are the minimum floors?
The RBI has fixed minimum provisions, so a bank’s model cannot go below them.
As summarised in published analysis of the directions, the Stage 1 floor is 0.40% for standard corporate loans, 0.25% for home loans and 1% for unsecured retail loans. The Stage 2 floor is 5% for most categories, and the RBI kept it even though some banks asked for a lower one. Stage 3 floors are far higher and depend on how long a loan has been in default.
The floors put a price on risk. A bank lending without security to a retail borrower must hold four times as much in Stage 1 as it does for a home loan.
The framework at a glance
- April 1, 2027start date, kept despite banks asking for more time
- 0.40%Stage 1 floor on standard corporate loans
- 5%Stage 2 floor for most categories
- 4 yearsphased capital relief, to March 31, 2031
Why are banks worried?
Because moving to the new system means finding a large sum on day one.
On April 1, 2027, banks must hold the extra provision the new rules require, over what they held a day earlier. That charge goes against retained earnings, not the profit and loss account. The RBI lets banks add the capital impact back in four steps, four-fifths in 2027-28 down to one-fifth in 2030-31, and those with enough capital can choose a shorter period.
State Bank of India chairman C S Setty said on November 3 that the bank puts its one-time, post-tax impact at ₹19,500 crore, or 40 to 50 basis points of its common equity tier 1 capital, and that it will take the four-year option. Bank of Baroda expects about ₹12,500 crore, Punjab National Bank about ₹8,000 crore, Union Bank of India ₹5,500 crore, Indian Bank about ₹3,500 crore and Indian Overseas Bank about ₹3,000 crore. Canara Bank has said ₹12,000 crore to ₹15,000 crore.
Lenders have argued that provisioning in one go would hurt profit and capital adequacy, and want the percentages reviewed. Setty said the RBI “remains open to discussions” on parts of the framework, and that a working group of banks is already working with the regulator.
What does it mean for borrowers?
Most borrowers will not notice at once, but loans that look riskier may cost more. Banks that must hold more against a type of loan can raise its price, tighten the terms or lend less of it. Commentators expect strong large corporates to see little change and small businesses, whose default risk is harder to model, to face closer scrutiny. That is an expectation, not a rule: the RBI has not set lending rates, and each bank will decide for itself.
For depositors, the aim of the change is protection. Banks that recognise losses early are less likely to be caught short when a downturn arrives. Non-banking lenders and large companies already follow a similar standard.
What happens next
The RBI was due to meet bank chiefs on November 12 to review their readiness, and had not announced an outcome by the evening. The regulator has so far held the date. Banks must report on both systems in parallel until December 31, 2027, and file the first quarterly ECL report by June 30, 2027. Their results for the coming quarters will show how much of the hit they have already provided for.