New Delhi: The Reserve Bank of India (RBI) has released draft guidelines under its new Expected Credit Loss (ECL) Direction-2026, which are scheduled to come into effect from April 1, 2027. The proposed framework is expected to significantly change the way banks assess and manage credit risk, potentially making loans more difficult and expensive for borrowers with weaker credit profiles.
Under the new norms, banks will be required to set aside substantially higher provisions against potential loan defaults. Financial experts estimate that the increased provisioning requirements could reduce the banking sector’s profits by as much as ₹42,000 crore.
Greater Importance of Credit Scores
The ECL framework is likely to make banks more selective while approving loans. Borrowers with a CIBIL score below 730 may face stricter scrutiny, higher interest rates, or additional collateral requirements. Industry estimates suggest that nearly 62% of loan applicants in India currently have credit scores below 730, meaning a large section of borrowers could find it harder to secure home, vehicle, and education loans in the coming years.
Risk-Based Lending to Become the Norm
According to banking experts, the new framework will encourage lenders to adopt a more risk-sensitive pricing model. Borrowers with strong credit histories are expected to benefit from lower and more competitive interest rates, while those considered high-risk may have to pay higher borrowing costs.
Damodaran C, Chief Risk Officer at Federal Bank, stated that the new system will push banks to price loans according to risk and strengthen their loan recovery mechanisms. Since risks will be assessed proactively, lenders are expected to closely monitor borrowers’ repayment behaviour and financial health.
Shift from NPA-Based Provisioning
The ECL model marks a major departure from the existing provisioning system, under which banks typically set aside reserves only after a loan remains overdue for more than 90 days and is classified as a Non-Performing Asset (NPA).
Under the proposed framework, banks will be required to estimate potential future losses in advance. Factors such as repayment history, changes in credit scores, income stability, employment security, and the loan-to-value (LTV) ratio will be considered while determining the level of provisioning.
Higher Provisioning for Delayed Payments
For a typical ₹25 lakh home loan, the provisioning requirements under the proposed norms would increase substantially:
- 1–30 days overdue: Provisioning would rise from about ₹10,000 to ₹25,000.
- 31–60 days overdue: Required provisions could increase sharply to ₹1.25 lakh.
- More than 90 days overdue: Provisioning would rise from around ₹3.75 lakh to ₹5 lakh.
Premium Borrowers to Gain Advantage
As banks prepare for the transition, borrowers with strong credit records are expected to benefit the most. Current estimates indicate that India has around 7 crore consumers with CIBIL scores of 730 and above, positioning them as preferred customers under the new risk-based lending regime.
The RBI’s proposed ECL framework is aimed at strengthening the banking system by ensuring that potential credit risks are identified and addressed early. However, it may also result in tighter lending standards and greater emphasis on maintaining a healthy credit score for prospective borrowers.
