The regulator added that banks have one year to work on the new framework, which seeks to identify early and provide against any bad loans, with a deadline of 1 April 2027.

On Monday, the Reserve Bank of India (RBI) announced its decision to deny lenders’ requests for extra time to shift to the expected credit loss (ECL) requirement. With the deadline set for 1 April 2027, the regulator emphasized that banks have a year to prepare for the new framework, which is designed for early detection and mitigation of potential loan losses.

Banks had requested for extra time to allow them to develop databases and models, and upgrade their systems to the new framework.

“In addition, to ease the transition to the new framework, a calibrated transition framework has been provided, including transitional arrangement for one-time capital impact on account of ECL transition, three-year timeline for application of effective interest rate on legacy loan accounts and guidance provided on key implementation issues,” RBI said on Monday.

This was referenced to an October 2025 draft circular, which provided a transition plan between the existing “incurred loss” provisioning rule to an ECL framework for scheduled commercial banks, as well as changes in credit-risk classification and risk weights.

The major distinction between the incurred credit loss and expected credit loss is that whereas the incurred model is reactive and only acknowledges such losses when it occurs, the new model is proactive and prospective.

The new guidelines will categorize financial assets into three steps, based on the change in credit risk since initial recognition, with a significant increase being a required condition.

The proposals are meant to make banks have forward-looking provisioning practices in order to bring the norms in India to the global standards. RBI has suggested a five-year glide path between April 1, 2027, when the new guidelines will become effective, and March 31, 2031.

RBI had also indicated in October that there might be different methods of calculating the expected credit loss. It had indicated that a bank will need to adopt a broad policy with three important functions that include probability of default (PD), loss given default (LGD) and exposure at default (EAD), and work within the guidelines.

RBI, in its Monday statement, revealed that the banks had requested a detailed explanation of how they would apply the framework, but their request had been denied. It explained that the ECL framework which is principle-based and necessitates institution-specific risk assessment.

“Banks differ materially in terms of portfolio composition, business models, customer segments, data availability, etc., and therefore, a uniform and highly granular implementation framework will not be appropriate across all banks,” RBI said.

Analysts already reported that the higher cost of credit could temporarily put a drag on the return on equity of banks.

In October, Motilal Oswal Financial Services wrote that the shift is easier handled by the more capital-buffered private banks, with more developed data systems and more developed risk models, whereas their public sector counterparts, with near-zero contingency buffers and a greater exposure to MSMEs, may need to do some extra provisioning.