RBI Proposes Expected Credit Loss Model, Banking Stocks Dip Amid Transition Plans

Shares of major banks fell on Wednesday following the Reserve Bank of India’s (RBI) proposal to shift from the incurred-loss provisioning framework to the Expected Credit Loss (ECL) model, signalling a significant change in credit risk management. Banking heavyweights, including State Bank of India (SBI), HDFC Bank, ICICI Bank, and Punjab National Bank (PNB) traded lower as investors digested the new guidelines.

The NIFTY BANK index is down 0.22% at 56,116.90, while the NIFTY FINANCIAL SERVICES index dropped 0.18% to 26,728.10. Among individual banks, SBI was trading 0.43% lower at ₹860.95, Bank of Baroda down 0.27% at ₹262.55, HDFC Bank slipped 0.16% to ₹980.90, and ICICI Bank declined 0.42% to ₹1,370.10.

Shift to Forward-Looking Credit Losses

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The ECL framework will require banks to estimate and recognise expected losses at the time a loan is issued, rather than waiting for evidence of default as under the incurred-loss model. This forward-looking approach is designed to enhance credit risk management, improve transparency, and align Indian regulations with global accounting standards.

Under the proposed model, loans and other financial assets will be classified into three stages — Stage 1, Stage 2, and Stage 3 — based on potential credit losses at initial recognition and on every reporting date. This staged classification aims to improve provisioning accuracy and ensure that banks remain resilient against credit risks.

Regulatory Alignment and Implementation Timeline

RBI’s draft ‘Scheduled Commercial Banks & All India Financial Institutions – Asset Classification, Provisioning and Income Recognition Directions, 2025’ also incorporates the Effective Interest Rate (EIR) method for income recognition and guidance on model risk management. The framework excludes Small Finance Banks, Payment Banks, Regional Rural Banks, and certain All India Financial Institutions.

According to the RBI, the overall impact on minimum regulatory capital will be negligible, even though the switch to ECL is anticipated to result in a one-time increase in provisioning. To make sure the transition is seamless and unobtrusive, a five-year glide path has been suggested. The RBI is requesting public feedback by November 30, 2025, and the rules are scheduled to go into effect on April 1, 2027.

Enhanced Basel Norms and Risk Sensitivity

Alongside the ECL framework, RBI released draft norms for the revised Basel Standardised Approach for credit risk. Changes include granular risk-weight treatments for corporates, MSMEs, and real estate, and inclusion of timely-repaying credit card transactors under the retail category. These measures aim to strengthen the robustness and risk sensitivity of capital charges for credit risk in Indian banks.

Conclusion

An important step towards improved credit risk management and global regulatory consistency has been taken by the RBI with its adoption of the Expected Credit Loss model.  The framework is anticipated to build a more robust financial system over time, offering clarity and stability for banks and investors alike, notwithstanding the short-term negative reaction of banking stocks.