Planned provisioning norms unlikely to hit private banks hard

Kolkata: Large private banks with high floating and contingent provisions would be less impacted when the expected credit loss-based provisioning system comes into force from April 1, 2027, analysts tracking the sector said.

Banks like Axis, HDFC and ICICI have built additional provisions, which would put them in a better position as compared to lenders without the buffer.

ECL is a forward-looking accounting standard that requires banks to make provisions on expected losses based on past asset quality, instead of incurred loss-based provisioning. The already created buffer would come into play from the first quarter of FY28.

"Banks with higher floating and contingent provisions would be less impacted by the ECL provisioning norm. Typically, a few large private banks have built material floating provisions as compared to their public sector peers," ICRA senior vice president and co-group head Anil Gupta told ET.

Several other banks—both in the public sector and private sector domains—also have floating provisions but the volume of these would not make material difference as the share of these in terms of their loan assets would be not very significant.

For example, HDFC Bank has one of the largest provision buffers with Rs 36,600 crore of floating and contingent provisions covering 1.4% of its gross advances at the end of June. To put things into perspective, at present 0.93% of its gross advances are covered under specific NPA provisions, according to the bank's first quarter numbers.

Likewise, ICICI Bank had Rs 13,100 crore of contingency provisions, which was nearly 1% of its total advances.

As things stand now, banks make 25-100% provisions when a loan is officially classified as NPA after 90 days of non-payment. The extent of provisions depends on the period for which the loan remained doubtful. Banks are required to set aside 25% if the loan remains doubtful for up to one year and 100% if the loan remains unpaid over three years. Banks also set aside 0.4% on some standard loans.

The ECL model will introduce three stages of provisioning that require banks to set aside funds much earlier.

"This shift will not only strengthen resilience and bring our provisioning practices in line with global standards, but also compel banks to fundamentally rethink how credit risk is assessed and managed," said Dhruv Parikh, partner-financial services risk consulting at EY India.

Under ECL, banks would have to make provisions on loans based on their historical credit losses. The current stress on the unsecured loans would put a higher provision burden on them from 2027 onwards till the asset quality of these segments demonstrate better trends over a longer period.

"Banks which have suffered higher levels of NPAs in the past will get impacted more," ICRA's Gupta said.

"Banks with higher SMA1 and SMA2 would need to make higher provisions at the transition point, which is April 1, 2027. This will be adjusted against their net worth and their book value of share will go down accordingly," he added.

The RBI has proposed a glide path till March 31, 2031 to ease the impact.

"The phased rollout provides breathing space, banks will need to invest early in data and governance capabilities to embed ECL seamlessly into their operating model," Parikh said.

The impact of the new system on capital would be less severe than what was thought earlier given the fact that the banking industry has seen consistent improvement in asset quality since 2019.

ICRA, which had earlier projected a 300-400 basis point reduction in core capital ratio of banks, now said the impact would be less.

This ECL framework will be applicable to scheduled commercial banks, excluding small finance banks, payment banks, regional rural banks and financial institutions.

"They will be given a glide path (till March 31, 2031) to smoothen the one-time impact of higher provisioning, if any, on their existing books," RBI governor Sanjay Malhota said while delivering the October monetary policy last week.