RBI’s ECL Framework To Raise Provisioning Burden For Microfin-focused Banks
The Reserve Bank of India’s (RBI) transition from the incurred loss provisioning model to the expected credit loss (ECL) framework is expected to have a varied impact across Indian banks, with microfinance-focused lenders likely to face the sharpest increase in provisioning requirements.The central bank announced that the new framework will come into effect from FY28, with a gradual implementation glide path extending until FY31. Alongside, draft guidelines on the Standardised Approach for Credit Risk are expected to propose lower risk weights for sectors such as MSMEs, residential real estate (including home loans), and infrastructure lending by non-banking financial companies (NBFCs).
The ECL model, aligned with international standards, estimates future credit losses based on probability-weighted assessments rather than realised defaults. This shift aims to make Indian banks’ provisioning more forward-looking and risk-sensitive.
Large banks with strong provisioning buffers and improving asset quality are expected to manage the transition smoothly. However, mid-sized lenders with significant exposure to personal loans, credit cards, and microfinance—such as IDFC First Bank, Bandhan Bank, RBL Bank, and Indian Bank—may see higher provisioning, weighing on profitability in the initial years.
Infrastructure financiers such as Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) are expected to benefit from lower risk weights on high-quality operational infrastructure projects, improving capital efficiency and lending capacity.
Banks with large microfinance portfolios, including Bandhan Bank, AU Small Finance Bank, RBL Bank, IndusInd Bank, and IDFC First Bank, are likely to experience higher delinquencies under the ECL framework, leading to an uptick in provisioning.
Public sector banks (PSBs) will also face higher provisioning needs, though the overall burden has eased compared to earlier estimates. The State Bank of India’s incremental provisioning requirement, for instance, has declined from about Rs 25,000 crore to under Rs 20,000 crore.
Among private lenders, Kotak Mahindra Bank is projected to face the steepest impact due to relatively lower contingency buffers, while Axis Bank and larger private peers are expected to see minimal additional provisioning requirements.
Brokerage estimates suggest incremental provisioning of about 1-2 per cent of total loans as the framework is phased in. The RBI’s gradual rollout is designed to mitigate one-time shocks for PSBs and mid-tier banks, allowing time for operational and capital adjustments.
The transition will compel banks to strengthen credit risk management practices, refine product pricing strategies, and enhance Early Warning Signal (EWS) systems, collections, and recovery processes.
While the phased adoption provides flexibility, analysts noted that proactive investment in data infrastructure, governance, and model calibration will be crucial for banks to maintain competitiveness, transparency, and investor confidence under the ECL regime.
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