RBI will soon issue discussion paper on expected credit loss provisioning
The Reserve Bank of India took the first significant step towards moving banks on the Ind-AS accounting standards. As per the new provisioning guidelines it will require lenders to provide for loans on the basis of an expected credit loss (ECL) approach, against the current incurred loss approach. The RBI will soon issue a discussion paper on proposed norms on various aspects of transitioning to the new system, the central bank said in a statement, as a part of additional measures after the monetary policy decision.
“As a further step towards converging with globally accepted prudential norms, it is proposed to adopt expected loss approach for loss allowances required to be maintained by banks in respect of their exposures,” RBI governor Shaktikanta Das said.
The incur credit loss model used by banks presently is based on the guidelines by the RBI where it takes into account by how many days the loan is delayed before classifying it as a stressed asset.On the other hand banks would be expected to factor in economic cycles, whether there is a potential bubble forming and then factor in while arriving at the health of a loan under the expected credit loss model. This would mean that banks would have to calculate the probability of a loan getting bad, before there are any indications of it going bad.If this model is followed it would lead to banks having to provision for these stressed loans much in advance and would impact the timing of recognition.
Experts point out that as banks have strengthened their capital position in the last two years, this is an opportune time to implement these rules. We see that the central bank is gradually bringing in a roadmap of transitioning towards Ind-AS, and this is a very good time because their is a lot of headroom as banks have strong balance sheets,” said Anil Gupta, Sector Head – Financial Sector Ratings, ICRA Ratings. “Even if there is a capital hit due to this banks will be able to recover in a much better manner.”
Reserve Bank categorised 16 big non-banking financial companies, including LIC Housing Finance and Bajaj Finance, as upper-layer NBFCs that will be subject to an enhanced regulatory framework.The RBI in October 2021 announced to put in place a four-layered regulatory structure for non-banking financial companies (NBFCs) to keep a stricter vigil on the shadow banking sector and minimise risks for the overall financial system.
The upper layer comprises those NBFCs, which are specifically identified by the Reserve Bank as warranting enhanced regulatory requirements based on a set of parameters.The 16 NBFCs shall put in place a Board approved policy for the adoption of the enhanced regulatory framework applicable to NBFC-UL and chart out an implementation plan for adhering to the new set of regulations within three months from the date of this press release.Further, the Board of these NBFCs shall ensure that the stipulations prescribed for the NBFC-UL are adhered to within a maximum time period of 24 months.
The 16 NBFCs in the list are LIC Housing Finance; Bajaj Finance; Shriram Transport Finance Company; Tata Sons; L & T Finance; Indiabulls Housing Finance; Piramal Capital & Housing Finance; Cholamandalam Investment and Finance Company; Shanghvi Finance; Mahindra & Mahindra Financial Services; PNB Housing Finance; Tata Capital Financial Services; Aditya Birla Finance; HDB Financial Services; Muthoot Finance, and Bajaj Housing Finance.
In order to bring the inflation rate back on target the RBI’s MPC announced a 50 bps hike in the repo rate to 5.90%. Consequently, the standing deposit facility (SDF) rate is now at 5.65% and the marginal standing facility (MSF) rate at 6.15%.
The RBI’s target for CPI inflation is 4% , with a flexibility of 2% on either side. The latest data showed that CPI inflation has remained above the RBI’s target zone for the first eight months of 2022.
