RBI forms an external working group for expected credit loss-based framework
Mumbai, October 4, 2023
The Reserve Bank of India (RBI) on Wednesday constituted a nine-member external working group to get independent views on Expected Credit Loss (ECL) based framework for provisioning by banks.
In January this year, the RBI had released a discussion paper for adoption of an expected loss-based approach for loan loss provision by banks. The RBI had sought comments on the paper till February 28.
Currently, banks are required to make loan loss provisions based on an incurred loss approach which needs banks to provide for losses that have occurred or incurred
In a press release issued on Wednesday, the RBI said several comments have been received from various stakeholders on the issues flagged in the discussion paper, which are being examined by it.
“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 in order to get independent inputs on some of the technical aspects having a bearing on the significant transition involved,” the release said.
The working group will be chaired by Prof R Narayanaswamy, former Professor, IIM Bangalore. The other members include Sanjay Kallapur, ISB, Hyderabad, Rajosik Banerjee, KPMG, S Srinivasa Rao, SBI, Rajendra Khandelwal, ICICI Bank and Susanta Baishya, HDFC Bank.
Canara Bank’s Adish Yadav, Saraswat Co-operative Bank’s Pravinkumar Taparia and Equitas Small Finance Bank’s Sridharan N are also part of the group.
The Reserve Bank of India’s proposal to implement expected credit loss (ECL)-based loss provisioning by banks could lead to a transitioning impact of 300-400 basis points, including the provisioning for ECL, while shifting to the IND-AS accounting system, a report said.
The group will delineate 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. It will recommend factors that banks should consider for determination of credit risk based on the guidance provided in International Financial Reporting Standards (IFRS) 9 and principles laid out by Basel Committee on Banking Supervision (BCBS).
The group will also suggest the methodology to be used for undertaking external independent validation of the models.
The RBI said the recommendations of the working group would be duly factored in while framing the draft guidelines, which will be put in the public domain for comments before issue of final guidelines.
[The Indian Express]
