RBI sets working group on ECL provisioning

Subject : Economy

Section: Monetary Policy

In News: RBI has constituted an external working group on expected credit loss (ECL) based framework for provisioning by banks.

Key Points:

RBI released a discussion paper in January this year on shifting from the incurred-loss approach to the ECL model, a transition aimed at making the banking system more resilient.
working group chaired by R. Narayanaswamy, former professor of IIM Bangalore, will have domain experts from academia and industry as also representatives from select banks

What is the ECL model?

ECL model proposed by the regulator, where banks have to recognize stress much earlier, is in contrast to the existing regime where banks make provisions after incurring losses.

Working group’s focus:

The group’s terms of reference will include laying down the principles for banks while designing the credit risk models to be used for assessing and measuring expected credit losses.
It will also recommend factors that banks should consider for determination of credit risk based on the guidance provided in IFRS 9 and principles laid out by BCBS.

What will be the impact of ECL framework implementation on banking sector?

Analysts’ estimates peg the impact of ECL on the core capital of banks at 200 basis points (bps). The current core capital —common equity tier 1 capital —of 46 banks stood at 13.7% on 31 March