Daijiworld Media Network - New Delhi

New Delhi, Apr 27: The Reserve Bank of India (RBI) has issued its final guidelines on asset classification and provisioning, introducing a major shift in how banks assess credit risk. The new rules, set to take effect from April 1, 2027, move the system toward a more forward-looking approach despite requests from lenders for a delay.

At the core of the revised framework is the Expected Credit Loss (ECL) model, a globally accepted standard that requires banks to anticipate potential losses in their loan portfolios. Unlike the current system, which recognises losses only after they occur, the ECL approach pushes banks to estimate future defaults and maintain sufficient provisions in advance.

Under the new structure, banks will classify assets using a three-stage mechanism based on changes in credit risk. Loans with no significant increase in risk will fall under Stage 1, where provisions are calculated based on expected losses over the next 12 months.

If credit risk rises substantially, the asset will move to Stage 2, requiring lenders to account for potential losses over the entire lifetime of the loan—even if the borrower has not yet defaulted. Stage 3 will include loans that are already under stress or impaired, attracting the highest level of provisioning due to increased default risk.

The RBI clarified that while this new staging system changes how risk is measured and provisioned, the definition of Non-Performing Asset (NPA) remains unchanged. Loans will continue to be classified as NPAs if repayments are overdue for more than 90 days.

The central bank said the revised framework aims to strengthen risk sensitivity, improve financial resilience, and align India’s banking norms more closely with global standards.