RBI may approve 1-3% provisioning floor for phase 2 loans under ECL framework: sources

FILE PHOTO: A man walks past the Reserve Bank of India (RBI) logo outside its headquarters in Mumbai, India, June 6, 2025. REUTERS/Francis Mascarenhas/File Photo | Photo credit: FRANCIS MASCARENHAS

Bankers in their representation to the RBI have requested to reconsider the proposal to make 5 per cent provision for phase 2 assets as they currently make only 0.4 per cent provision for most standard and stressed assets (see the table for details on provisioning minimums). 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.

“If you look at the draft guidelines or the fine print thereof, there are many regulations or minimum levels prescribed which means the pure ECL benefits could be negated. If not, you may have to maintain even higher ECL levels if such draft guidelines were to go through. Clearly, we have to wait and see when these start coming out as final guidelines,” said Sashidhar Jagdishan, MD & CEO, HDFC Bank.

“Banks cannot recognize NPA as a default asset even after six months of full payment by the borrower. Creating higher provisioning for phase 2 loans could hit the capital ratios of some lenders hard and stifle growth,” said another private banker seeking anonymity. According to ICRA Ratings, banks’ shift to ECL model from incurred loss model could have an impact of less than 150 basis points (bps) on their capital ratios. Banks that rely on riskier segments such as unsecured credit cards and microloans will be most affected by the shift to the ECL model, analysts say.

Impact on profitability

Vivek Iyer, partner at Grant Thornton Bharat, says that from a short-term perspective, there will be an impact on profitability despite the glide path provided to implement the ECL guidelines. “It would be worthwhile for the RBI to revisit the proposed floor rates, keeping in mind that if systemic risk builds up in certain asset classes, the same will be reviewed,” he said.

While Bank of Baroda has made ₹400 crore in floating provisions for transition to the ECL model in Q2 FY26, other bigger banks like State Bank of India and HDFC Bank are waiting for the final guidelines to create ECL-specific provisions.

Published on November 16, 2025