RBI’s New ECL Regime for Banks: From “Incurred Loss” to “Expected Loss”
1. Background: Why RBI has moved to an ECL-based regime
Commercial lending inherently carries credit risk – every rupee advanced by a bank may not necessarily come back. Traditionally, banking regulators have addressed this through minimum provisioning norms so that banks hold a buffer against loan losses.
In India, the prevailing approach until now has been an “incurred loss” model. Under this, banks were generally required to create higher provisions only when clear signs of stress were visible – typically when the borrower defaulted on repayment or the loan slipped into non-performing asset (NPA) status.
This backward-looking design had two major drawbacks:
- Provisions were recognised after the problem became evident, not when risk was building up.
- Unexpected loss events could cause sudden hits to profits and capital, potentially destabilising individual banks and, by extension, the wider financial system.
Recognising these issues and aligning with global prudential standards, the Reserve Bank of India (“RBI”) has now adopted a forward-looking, probability-based provisioning framework for commercial banks.
2. New IRACP Directions and the shift to ECL
Vide notification dated April 27, 2026, RBI issued the Reserve Bank of India (Commercial Banks – Asset Classification, Provisioning and Income Recognition) Directions, 2026 (“New IRACP Directions”). These directions embed a comprehensive ‘Expected Credit Loss’ (“ECL Framework”) for commercial banks.
This represents a fundamental policy change from the existing asset classification and provisioning architecture (“Existing IRACP Directions”), under which higher provisions were triggered only when the asset started showing visible stress and moved into NPA buckets.
2.1 Effective dates and transition period
- The New IRACP Directions, including the ECL Framework, will come into force from April 1, 2027.
- Legacy loan portfolios that are not presently under the effective interest rate regime must be transitioned to the EIR methodology by March 31, 2030 at the latest.
During this transition, banks will need to recalibrate systems, data architecture, portfolios and internal policies to align with the new forward-looking requirements.
2.2 Measurement at amortised cost using EIR
The ECL Framework mandates that banks measure financial assets at amortised cost using the effective interest rate (“EIR”) method. Under this approach:
- The original carrying value of the loan is adjusted for fees, transaction costs, premiums, discounts and repayments over the loan’s life.
- Interest income recognition is aligned with the internal rate of return on the asset.
- Provisioning for expected credit losses is integrated into the overall measurement, rather than being treated as a purely ex-post adjustment.
This leads to a more realistic reflection of both income and risk across the lifecycle of the loan.
3. Position under the Existing IRACP Directions
To appreciate the extent of change, it is useful to briefly recall the current regime.
3.1 Asset classification
Under the Existing IRACP Directions, loan assets are broadly classified as:
- Standard assets – accounts where payments are timely and there are no visible credit concerns.
- Non-performing assets (NPAs) – accounts with overdue status beyond regulatory thresholds, further subdivided into:
- Substandard assets
- Doubtful assets
- Loss assets
3.2 Provisioning norms under existing regime
For standard assets, provisioning is relatively low and ranges roughly between 0.25% to 1%, depending on the product category.
Once an account slips into NPA status, the provisioning requirement increases substantially:
- For substandard assets:
- Secured portion – 15%
- Unsecured portion – 25%
For doubtful and loss categories, the provisioning percentages climb further, often approaching full provisioning for irrecoverable exposures.
The key feature is that higher provisions kick in only after the account has deteriorated enough to be tagged as NPA, i.e., after the loss event has already materialised or become imminent.
4. Core design of the ECL Framework
The ECL Framework introduced via the New IRACP Directions shifts the focus from “loss incurred” to “loss expected”. Instead of waiting for default, banks must estimate the credit losses that could reasonably arise in the future and provide for them in advance.