look news india
To make the Indian banking system more secure, transparent and capable of handling financial shocks at par with global standards, the Reserve Bank of India (RBI) has decided to implement two major policy reforms mandatorily from April 1, 2027. The first change is related to the minimum capital requirements for ‘market risk’ of banks under the international Basel III framework. The second biggest historical change is the adoption of forward-looking ‘Expected Credit Loss’ (ECL) model by removing the old ‘Incurred Loss’ model of provisioning.
Till now, Indian banks used to keep capital aside (provisioning) for a loan after it defaults or becomes NPA, but under the new rules, as soon as the loan is distributed, the money will have to be kept safe after assessing the possible loss in advance. The Reserve Bank has given banks enough time till April 1, 2027, to upgrade their IT systems, data architecture and risk management models. This step will act as a safety net to protect the country’s banks from collapse during financial crises.
These reforms, to be effective from April 1, 2027, will bring about drastic technical and structural changes in the internal financial operations of banks:
1. Three-Stage ECL Classification: Banks will have to divide all their loans and investments into three phases:
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Stage 1 (Performing Assets): Loans where there is no increase in credit risk; There will be provisioning for these equal to 12 months’ possible loss.
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Stage 2 (Under-Performing Assets): Where there are early signs of non-payment of installments on time or increasing risk, provision for the entire loan tenure (Lifetime ECL) will be mandatory.
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Stage 3 (Credit-Impaired): Accounts that have actually defaulted will be subject to the full lifetime provisioning burden.
2. Clear Division of Banking Book and Trading Book: Under the Basel-III market risk norms, RBI has drawn a clear boundary between the ‘trading book’ and ‘banking book’ of banks. Banks will have to maintain separate additional capital buffers, both at the consolidated and standalone levels, to deal with fluctuations in foreign exchange, bond yields, debt mutual funds, ETFs and derivatives.
These technical rules will have a direct impact on the pockets of common customers, home loan takers and small businessmen visiting bank branches:
Strict credit score and history checks: Since banks will have to estimate possible losses as soon as they give a loan, banks will now become extremely cautious. Those customers whose CIBIL score is less than 750 or who have delayed in paying credit card bills and EMIs in the past, will be placed in the ‘high risk’ category (Stage 2 risk) by the banks. Loans of such customers may get rejected immediately or they may have to go through more paperwork.
Unsecured loans can be expensive: Personal loans, credit cards and unsecured business loans carry higher risks. After the new rules, banks will have to keep more provisioning on these, which will increase the cost of banks. To compensate for this increased cost, banks can increase the interest rates and processing fees of unsecured loans. However, customers with excellent credit profiles will continue to benefit from lower interest rates.
Depositors’ money will be more secure: The biggest and positive impact of this entire change will be on common savings account holders and FD investors. With banks already setting aside huge funds for potential risks, the chances of banks suddenly being burdened with NPA or getting into trouble will be greatly reduced. With this, the hard earned money of the common people will remain safer in their bank accounts than before.
Instead of immediately implementing these rules after issuing the final guidelines, RBI has fixed the date of April 2027 so that the banking system does not face any sudden capital shock. If these rules were implemented overnight, banks would have to immediately put lakhs of crores of rupees of their profits into provisioning, which could reduce their net profit and ability to give loans.
To balance this impact, the Reserve Bank has also given a gradual transition period of four years (Glide Path Transition) from the financial year 2027-28 to March 31, 2031. During this four-year period, banks will be able to gradually adapt their balance sheets to the new rules. According to rating agencies, Indian banks currently have adequate capital buffers and high provision coverage ratio (PCR), due to which they will easily adapt to this big change of 2027 without any financial instability.