RBI forms external working group for provisioning of banks on Expected Credit Loss (ECL)

The Reserve Bank of India (RBI) on Wednesday constituted a nine-member external working group to get independent views on Expected Credit Loss (ECL) based framework for provisioning by banks.

The ECL approach to provisioning is a paradigm shift from the current incurred loss-based provisioning regime.

The Discussion Paper released by RBI on January 16, 2023, envisages a forward-looking, principle-based framework for provisioning for credit risk, which has already been implemented under the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB).

The Working Group will be chaired by Prof. R. Narayanaswamy, former Professor, at IIM Bangalore along with domain experts from academia and industry as well as representatives from select banks. The group will delineate the principles that will be required to be considered by banks while designing the credit risk models to be used for assessing and measuring expected credit losses. It will recommend factors that banks should consider for the determination of credit risk based on the guidance provided in International Financial Reporting Standards (IFRS) 9 and principles laid out by the Basel Committee on Banking Supervision (BCBS). The group will also suggest the methodology to be used for undertaking external independent validation of the models, said RBI.

“The recommendations of the Working Group would be duly factored in while framing the draft guidelines, which shall be put in the public domain for comments before issuing of final guidelines,” says RBI circular.