MUMBAI: The Reserve Bank has proposed significant changes to the way banks assign risk weighting to loans and the so-called expected credit loss (ECL) framework, in a move aimed at aligning domestic regulations with global norms.
The new changes pertain to how banks assess loan risks and set aside funds for potential losses. The move is expected to reduce the capital banks need to hold for various loan types, particularly benefiting MSMEs and real estate sectors.
The proposed changes seek to ease the risk weighting, or capital that must be set aside, for different types of loans.
Major changes proposed in a new circular issued Tuesday include differentiated risk weights for corporate loans, loans to micro, small and medium enterprises (MSMEs) as well as real estate exposures.
The RBI also proposed including transactors, or credit card users who repay dues on time, in the regulatory retail category.
"The proposed changes are estimated to have a positive impact on the minimum regulatory capital requirements of banks," the RBI said.
The regulator further said segments such as MSMEs, real estate and credit card exposures will particularly benefit from these changes. The RBI also proposed changes to the ECL framework, which would require banks to set aside more funds for potential bad loans.
Under the draft ECL framework, banks would be required to classify loans into stages based on credit risk, while continuing to apply existing rules for classifying non-performing assets, or loans that have turned bad.
While the shift from an incurred-loss to an expected-loss model for provisioning can lead to a one-time increase in provisions, the RBI said the overall capital impact would be minimal, supported by a proposed five-year transition period.
The RBI said last week that the implementation of the ECL rules will take effect on April 1, 2027, giving banks a breather on capital requirements. The central bank has invited public comments on both drafts until November 30.