Impact on ECL: Banks could increase lending rates and revise lending strategy, experts say

Expected credit losses will help banks better understand their portfolio mix | Photo credit: iStockphoto

“Expected credit losses will help banks better understand their portfolio mix and help them price their portfolio appropriately to account for risk, or rebalance their portfolio with customers and products that offer higher risk-adjusted returns. Banks are already thinking in this direction and with ECL implementation delivering the right data points, we will see these changes happen,” said Vivek Iyer, partner and national financial services leader, Grant Thornton Bharat.

business line previously reported that the regulator may consider approving bankers’ request to reduce the provisioning requirement for phase 2 loans to 1-3 percent, from the proposed 5 percent under the draft ECL guidelines. Bankers requested that the proposal be reconsidered as they currently provision only 0.4 percent for most standard and stressed assets. They say that in segments like home and auto loans, there is an average recovery rate of 50 percent from delinquent and non-performing assets (NPAs). Phase 2 advances are essentially loans that are 61 to 90 days in arrears.

A change in mentality

Abizer Diwanji, founder of NeoStart Advisors, says ECL will represent a major mindset shift for banks, which will require them to analyze data and estimate historical ECL information such as standard deviations and bond market volatility, among other factors. India has not implemented IFRS standards for banks in the past because lenders were not adequately capitalized and had higher NPAs, which is not the case currently.

“If an expected loss has to be calculated in accounting, even if banks are lending, they will start calculating the expected loss on that exposure. And they will rightly build that into the price. So the credit markets will move more towards what real risk-based pricing should be, rather than what it is now, which is quite arbitrary,” he said.

A senior PSU banker said loan interest rates could rise by 5 to 10 basis points (bps) with full implementation of ECL norms for large banks, and higher for smaller and mid-sized banks. Small and mid-sized lenders with higher exposure to unsecured loans could move more toward secured loans, he said.

Published on December 24, 2025