RBI's ECL shift may hit banks' CET-1 ratio by 120 bps: Crisil

RBI's proposed shift to an expected credit loss (ECL) framework may cause a one-time net impact of up to 120 bps on banks' CET-1 ratios, but credit profiles will remain stable, says a Crisil Ratings report.

Reserve Bank of India's (RBI) proposed shift to an expected credit loss (ECL) framework could lead to a one-time net impact of up to 120 basis points (bps) on banks' Common Equity Tier-1 (CET-1) ratios, though the overall credit profiles of lenders are expected to remain stable says Crisil Ratings.

In a press release, Crisil said banks would be allowed to spread the impact over four financial years, while additional provisioning buffers could further mitigate the hit. Given the sector's strong capitalisation, the transition is unlikely to materially affect banks' credit strength. The RBI's directions introduce a three-stage asset classification system based on probability of default, loss given default and exposure at default, along with minimum provisioning thresholds to ensure prudence. The norms, largely in line with draft guidelines issued in October 2025, will come into effect from April 1, 2027.

Gross vs Net Impact Explained

Subha Sri Narayanan, Director, Crisil Ratings says, the gross impact of the transition could be as high as 170 bps for most banks.

"As banks migrate from the existing incurred-loss-based model to a forward looking ECL framework for provisioning, the gross impact on their CET-1 ratio is expected to be up to 170 bps for most, varying based on portfolio composition, past asset quality track record and existing provisioning levels." noted Narayanan "However, factoring in provisions already made, the net impact is expected to be significantly lower at up to 120 bps," Narayanan added.

Well-Capitalised Banks to Absorb Transition

Crisil noted that the most significant impact would arise from Stage II assets, where provisioning requirements could increase sharply compared with current norms. However, the relatively low share of such assets in the banking system--around 2-2.2 per cent--will help contain the overall effect. The new framework will also extend provisioning requirements to off-balance-sheet exposures and undisbursed credit limits, leading to higher overall provisioning.

Despite this, the rating agency highlighted that Indian banks are well placed to absorb the transition, supported by a healthy CET-1 ratio of around 14 per cent as of March 31, 2026, and steady profitability, with return on assets of about 1.25-1.3 per cent in the last fiscal.

Structural Rise in Credit Costs

Vani Ojasvi, Associate Director, Crisil Ratings says, the ECL regime would not only have a one-time impact but also lead to a structural rise in credit costs.

"This is because banks will have to provide more for incremental Stage III assets compared with the current 15% mandate for sub-standard assets. Additionally, provisions will be higher even for delinquent assets that haven't yet reached Stage III. While banks are currently in an improved profitability cycle, they will need to proactively focus on bolstering their net interest margins and controlling operating expenses to mitigate this impact." Ojasvi noted.

Enhanced Resilience and Global Alignment

Crisil added that the ECL framework would enhance the resilience of banks against unforeseen shocks, align India's banking norms with global standards, and improve transparency and accountability in credit risk management. Overall, the agency expects banks' credit profiles to remain stable despite the transition. (ANI)

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