Banks and Financial Institutions will face tighter norms relating to asset classification and provisioning, whereby they will have to adopt a staging criteria for asset classification under the Expected Credit Loss (ECL) approach against the current incurred-loss-based provisioning framework. Further, they will have to introduce additional early warning indicators for spotting stressed assets.
The aforementioned norms, which will come into effect from April 1, 2027, are as per RBI’s amendment directions for dealing with stressed assets.
Pro-active Approach
As per the amended prudential norms on capital adequacy, banks and FIs will introduce a staging criteria for asset classification (Stage-1: loans with low risk; Stage-2: loans with increased risk; and Stage-3: impaired loans) under ECL approach even as extant norms for Non-performing Asset (NPA) classification continue. ECL approach requires pro-active provisioning rather than waiting for an asset to turn non-performing.
Provisions or loan-loss reserves held against future, presently unidentified losses, which are freely available to meet losses which subsequently materialise, will qualify for inclusion within Tier 2 capital.
Accordingly, general provisions on standard assets (Stage 1 or Stage 2 assets), and any excess provisions which arise on account of sale of NPAs shall qualify for inclusion in Tier 2 capital.
Prudential Framework
However, these items together shall be admitted as Tier 2 capital up to a maximum of 1.25 per cent of the total credit RWAs (risk-weighted assets) under the standardised approach. So, the bottomline impact of what is set aside as provisions is sought to be offset to an extent by including the same as Tier-2 capital.
Jatin Kalra, Partner, Grant Thornton Bharat, said: The RBI’s final Expected Credit Loss (ECL) Directions mark a significant milestone in strengthening India’s prudential framework, moving the system towards a more forward-looking and risk-sensitive provisioning regime while preserving the robustness of the existing NPA architecture.
“The final framework reflects a thoughtful calibration by the regulator. They have responded meaningfully to industry feedback on prudential floors, cooling period for upgrade of NPA loans, EIR (Effective Interest Rate) implementation, and operational complexities. The transitional arrangements to spread the capital impact over multiple years does help, but most banks will have to work tirelessly to develop the databases, models and upgraded systems required for this transition.”
Stressed assets: Warning indicators
Factors such as significant downgrade in a financial instrument’s external/ internal credit rating; significant changes in the value of the collateral supporting the obligation; and any delay in payment of fee/ charges from the due date will form part of an indicative list of signs (warning indicators) that banks will look for to zero in on asset facing financial difficulty.
The aforementioned requirements are as per the Reserve Bank of India (Commercial Banks – Resolution of Stressed Assets) Amendment Directions, 2026, which will come into effect from April 1, 2027.
Further, expected changes in the loan documentation, including an expected breach of contract that may lead to covenant waivers or amendments, interest payment holidays, interest rate step-ups, requiring additional collateral or guarantees, among others, will also be part of will form part of the aforementioned list.
The facility of freezing of provisions will lapse immediately if the Adjudicating Authority rejects a resolution plan, per the amendments.
For accounts which have availed Date of Commencement of Commercial Operations (DCCO) deferment and are classified as ‘standard’, a bank shall maintain additional specific provisions over and above the applicable staging provisions, RBI said.
Published on April 27, 2026