Discussion Paper on Expected Loss Based Approach for Loan Loss Provisioning by Banks

In the Statement on Developmental and Regulatory Policies announced by RBI on Friday, RBI said that as a step towards converging with globally accepted prudential norms, it will issue a discussion paper on the proposed transition for stakeholder comments.

Banks currently follow the incurred loss approach for provisioning on their loan assets, whereby provisions on loan assets are made after the stress has materialised.

“A more prudent and forward-looking approach is the expected loss based approach, which requires banks to make provisions based on an assessment of probable losses”, Governor Shaktikanta Das said in his statement.

The inadequacy of the incurred loss approach for provisioning by banks and its procyclicality, which amplified the downturn following the financial crisis of 2007-09, has been extensively documented, the statement said.

One of the major elements of the global response to these findings has been a shift to the expected credit loss (ECL) regime for provisioning. As a further step towards converging with globally accepted prudential norms, it is proposed to adopt the expected loss approach for loss allowances required to be maintained by banks in respect of their exposures. As a first step, a discussion paper on the various aspects of the transition will be issued shortly” the statement said.

Discussion Paper on Securitisation of Stressed Assets Framework (SSAF):

RBI also said that it has been decided to introduce a framework for securitisation of stressed assets in addition to the ARC route, similar to the framework for securitisation of standard assets. Accordingly, a Discussion Paper (DP) detailing relevant contours of the proposed framework will be issued shortly inviting comments on certain specific aspects.

In September 2021, the Reserve Bank issued the revised framework for securitisation of standard assets. As regards securitisation of non-performing assets, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 currently provides a framework for such securitisations to be undertaken by Asset Reconstruction Companies (ARCs) licensed under the Act.

“However, based on market feedback, stakeholder consultations, and the recommendations of the Task Force on Development of Secondary Market for Corporate Loans (RBI, 2019), it has been decided to introduce a framework for securitisation of stressed assets in addition to the ARC route, similar to the framework for securitisation of standard assets”, the statement said.

Accordingly, a Discussion Paper (DP) detailing relevant contours of the proposed framework will be issued shortly inviting comments on certain specific aspects, RBI said