RBI Issues Draft Directions and Invites Comments on Capital Charge and ECL-based Provisioning Framework for Banks [Read Press Release]
The Reserve Bank has proposed two key draft directions to strengthen credit risk and provisioning frameworks and inviting comments on the same.
RBI - ECL - Taxscan
RBI - ECL - Taxscan
The Reserve Bank of India (RBI) on October 7, 2025, issued two sets of draft Directions in pursuance of an announcement made in the Statement on Developmental and Regulatory Policies issued on October 1, 2025.
The latest frameworks have been proposed by the RBI with the motive to enhance the robustness, granularity and risk sensitivity of credit risk capital requirements while transitioning the banking sector towards an Expected Credit Loss (ECL) based provisioning regime.
The first draft, titled Reserve Bank of India (Scheduled Commercial Banks –Capital Charge for Credit Risk – Standardised Approach) Directions, 2025, seeks to implement a key element of the global Basel Committee on Banking Supervision (BCBS) reforms, but adjusted with requisite adaptations made in the Indian context.
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The proposed revisions introduce nuanced treatment of exposures to corporates, micro, small and medium enterprises (MSMEs) and real estate; inclusion of “transactors” within the regulatory retail category. “Transactors” have been defined as credit card holders with timely repayments over the past 12 months.
The Draft Directions also change how banks measure risks on off-balance sheet exposures and require them to adjust loan risk weights according to the past default history of each credit rating agency and the quality of due diligence carried out by the banks.
According to the draft, these changes are expected to have an overall positive impact on minimum regulatory capital requirements, with segments such as MSMEs, real estate and credit cards benefitting in particular.
The second draft, titled Reserve Bank of India (Scheduled Commercial Banks &All India Financial Institutions – Asset Classification, Provisioning andIncome Recognition) Directions, 2025 proposes to replace the existing incurred-loss-based provisioning framework with an ECL-based model. The ECL approach aims to strengthen credit risk management practices, improve comparability across financial institutions and bring India’s regulatory norms in line with international accounting standards.
The key elements of this draft include the introduction of staging criteria for asset classification under the ECL approach, prudential floors for Stage-1, Stage-2, and Stage-3 exposures, alignment of income recognition norms with the Effective Interest Rate (EIR) method and also contains broad principles on model risk management for implementing ECL models.
Although the transition is expected to result in a one-time increase in the amount that banks must set aside to cover possible loan losses (provisioning), the RBI has clarified that the overall impact on minimum capital requirements would be minimal, as all banks are expected to have no hitches in remaining compliant. The proposed five-year glide path is expected to ensure a smooth and gradual transition.
The RBI is inviting comments on the draft Directions from the public and stakeholders until November 30, 2025. Feedback may be submitted through the ‘Connect2Regulate’section on the RBI website, or by forwarding written comments to the Chief General Manager, Credit Risk Group, Department of Regulation, Central Office, Reserve Bank of India, Mumbai, or via email at feedbackcrg@rbi.org.in.
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