From Incurred Loss to Expected Credit Loss: A Pre-Implementation Assessment for Indian Banks

The Reserve Bank of India’s proposed transition from the incurred-loss regime to an expected credit loss (ECL) framework, aligned with IFRS 9, marks a significant shift in provisioning practices for Indian banks. This paper evaluates the potential impact of the ECL framework on provisioning levels and capital buffers of Indian banks. Using a top-down approach, key risk parameters—probability of default, loss given default, and exposure at default—are estimated for major bank groups over FY2019–FY2025 and applied to derive stage-wise ECL provisions as of FY 2025. The results indicate a rise in total provisions across all bank groups, driven by expanded coverage, higher values of risk parameters, and regulatory floors on Stage 2 assets. Capital ratios are expected to decline modestly but remain above regulatory thresholds. The study also highlights implementation challenges relating to data, modelling, and governance, with implications for financial resilience and bank preparedness ahead of the 2027 transition.