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A major and historic change is going to happen in the Indian banking system, the echo of which will be heard across the country.
The Reserve Bank of India (RBI) is now going to implement a new system, which will completely change the way banks lend, assess risk and make provisioning. If you are also thinking of taking a loan from a bank, then this news is very important for you. Because in the coming days, banks will now think ten times before giving a loan.
According to information received from sources, RBI is soon going to issue final guidelines on ECL i.e. ‘Expected Credit Loss’ model. This new rule will be applicable to all banks from April 1, 2026 and is aimed at making the banking system more secure and transparent.
How does the system work now?
Currently, when banks in India give a loan to someone, they do not consider it a significant risk until that person defaults on their EMI for 90 days. As soon as 90 days pass and the payment is not made, the bank declares that loan as an NPA (non-performing asset). After this, the bank sets aside some money from its earnings to cover the loss, which is called provisioning. This current system is called ICL i.e. incurred credit loss model.
What will change now? What is the ECL model?
RBI’s new ‘Expected Credit Loss’ (ECL) model is a forward-looking approach. This means that now banks will assess from the very first day of lending how much risk there is of that loan going bad. Looking at the customer’s financial condition, credit score, source of income and market conditions, banks will decide how much loss can be incurred in the future. Based on this estimate, the bank will have to make a small provision from the beginning, so that if the loan goes bad in the future, the bank is already prepared.
What will be the impact on the common man?
Banks will be stronger
With this model, the banking system will become more stable and robust. In times of economic crisis or recession, banks will be able to compete better, so that the money of the common people will also be safe.
Getting a loan can be a bit difficult.
Now banks will have to assess the potential risk with every loan, so they will be more careful before granting loans. People who have a bad credit history or unstable income may have difficulty getting loans.
Interest rates may be affected.
Increasing provisioning may increase the cost of banks, which may also affect the interest rates on loans. However, the extent of this impact will be clear only after the final guidelines from the RBI.
Why is this change necessary?
This model has already been implemented in the US, UK, Europe and many developed countries. Its aim is to make banks more risk-aware and prevent the problem of NPA at an early stage. RBI had released its draft on 16 January 2023 and now it is being finalized soon.
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