Together they are driving the industry decisively towards global best practices in credit risk modelling, provisioning discipline and capital efficiency.
Under the proposed ECL regime, all scheduled commercial banks will transition to a model-based provisioning system from April 2027, with a phased progression through FY 2032.
The framework introduces a three-tiered classification of assets – performing, underperforming and credit-impaired – in addition to model-driven provisions anchored in probability of default (PD), loss given default (LGD) and exposure given default (EAD).
Regulatory minimums, such as 0.25–1.25% for phase 1 and 25–100% for phase 3 assets, are intended to prevent underprovisioning and ensure consistency among lenders.
This transition is expected to lead to earlier recognition of credit losses and greater transparency in asset quality. While short-term profitability may be under pressure due to higher provisioning, the long-term benefit lies in greater resilience and comparability of financial statements.
Stronger private lenders – backed by robust data infrastructure, capital buffers and advanced risk systems – are better positioned for a smooth migration, while public sector banks, now armed with stronger balance sheets and high provision coverage, are also better prepared than in previous credit cycles.
The RBI’s simultaneous review of risk weights for retail, SME and corporate exposure will further shape capital allocation.
Lower risk weights for affordable housing (20-40%) and rated SMEs (up to 85%) will increase the flow of credit to priority segments, while higher weights for commercial real estate (150%) and unsecured loans reinforce caution amid rapid growth in private lending.
Linking capital standards to credit ratings and project phases will improve risk differentiation and promote disciplined lending.
Structurally, these reforms mark a decisive step towards forward-looking risk management and calibrated capital deployment.
Over the medium term, the combination of ECL-based provisioning and risk-sensitive capital standards will improve the stability, credit discipline and investor confidence of the banking system, laying the foundation for a more resilient and transparent financial sector.
Top picks
HDFC Bank – TP: Rs 1,150 HDFC Bank is poised for a healthy growth recovery after moderating credit expansion in FY25 to rebalance CD ratio and strengthen commitment granularity. Growth momentum is expected to accelerate in FY26-27, led by renewed corporate loan growth, retail portfolio expansion and technology-driven efficiency gains.
The bank’s strategic focus on deposit mobilization – anchored by high-quality, granular commitments – improves funding stability even as CASA normalises.
Near-term net interest margins (NIMs) may remain under pressure due to policy rate adjustments, but better funding mix and loan repricing should fuel recovery by FY27. Asset quality remains resilient, supported by best-in-class underwriting and strong provisioning buffers.
With continued investments in technology, branch expansion and risk management, HDFC Bank is well positioned to achieve superior profitability and maintain consistent RoA/RoE recovery as growth normalizes.
State Bank of India – TP: Rs 1,000
SBI stands out for its diversified growth momentum across retail, SME and corporate segments, backed by a robust credit pipeline and digital transformation.
The bank’s asset quality has improved significantly, with a GNPA of 1.8% and provision coverage of almost 79%, positioning the bank well for the upcoming transition to the ECL regime.
The credit growth of ~12% on an annual basis and healthy deposit growth underline its strong position, while the capital ratios (CET-1 of 11.1%) provide sufficient buffer for expansion.
Margin pressure from higher deposit costs is expected to ease from the second half of FY26, aided by CRR normalization and an improved credit mix. Structural tailwinds from government-led capital investments, resilient SME lending and operational efficiency gains continue to support profitability.
We expect RoA/RoE of 1.1%/15.5% for FY27E, reflecting SBI’s strong operating leverage, muted credit costs and sustainable earnings visibility over the medium term.
(The author is Head – Research, Wealth Management, Motilal Oswal Financial Services Ltd)
(Disclaimer: Recommendations, suggestions, views and expert opinions are their own. These do not represent the views of the Economic Times)
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