RBI Big Rule Change: Banks to adopt ECL model for loan provisioning from 2027

The Reserve Bank of India (RBI) is planning a fairly big change in how banks deal with loan risk, and it’s going to shift the way provisioning has worked for years.

Till now, banks mostly set aside money after a loan shows stress or turns bad. That approach is changing. RBI is bringing in the Expected Credit Loss (ECL) model, where banks will have to estimate possible losses in advance and make provisions much earlier.

In simple terms, it’s less about reacting after something goes wrong and more about preparing for what could go wrong.

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Loans will be split into three buckets

Under the new system, every loan will fall into one of three stages depending on its risk level.

Stage 1 is the normal category. These are regular, healthy loans where repayment is on track and risk is low. Banks will keep provisions based on expected losses over the next 12 months.

Stage 2 is when things start to look a bit shaky. The borrower hasn’t defaulted, but there is clear increase in risk. These loans will need tighter monitoring, and provisioning will shift to lifetime expected losses instead of just a short window.

Stage 3 is the stressed or bad category. These are credit-impaired loans where recovery is uncertain or already failing. Here, banks will have to account for full lifetime losses.

NPA rules won’t change

Even with this overhaul, RBI has kept the basics of NPA recognition unchanged. A loan will still become a non-performing asset if repayment is overdue by 90 days.

Also, the existing rule continues — if one loan of a borrower turns bad, all other loans linked to that borrower will also be treated as NPAs.

More focus on forward-looking risk

What really changes is how risk is measured. Banks will no longer rely only on past defaults or history. They will have to use models that try to predict future risk as well.

These models will also factor in the broader economy — things like inflation, GDP growth, interest rate movements, and overall financial conditions. So the health of the economy will directly influence how much banks set aside.

Even interest calculations will now include all charges and fees, giving a more complete picture of exposure.

When it kicks in

The new system will come into effect from April 1, 2027, giving banks time to upgrade systems and adjust to the new way of working.
Overall, the shift is aimed at making banks more prepared for stress before it actually shows up, instead of dealing with damage after the fact.