Will RBI's latest ECL framework impact borrowers with low credit scores? Experts explain

The Reserve Bank of India (RBI) is set to implement the Expected Credit Loss (ECL) framework for banks from April 1, 2027. The framework has triggered widespread discussion on social media, particularly around claims that borrowers with a credit score below a specific level may face difficulty in getting loans.

However, banking and financial sector experts in a conversation on Zee Business clarify that there is no RBI directive linking loan eligibility to any fixed credit score threshold.

What is the RBI’s ECL framework?

Under the current banking system in India, lenders make provisions against loans only after they turn into non-performing assets (NPAs). Under the ECL framework, banks will be required to estimate potential credit losses from the time of loan disbursement itself, even before any default occurs.

In simple terms:

• Banks will assess risk from day one of lending
• Provisioning will be based on expected future losses
• Risk assessment will become forward-looking rather than reactive

The objective of the framework is to strengthen the banking system by making credit risk provisioning more anticipatory.

No RBI rule linking loans to specific credit score

Certain claims suggest that borrowers with a credit score below a certain level may not get loans under the new framework. Experts have denied this interpretation.

Anil Gupta, Senior Vice President and Co-Group Head, Financial Sector Ratings at ICRA, stated that there is no RBI guideline prescribing any minimum credit score for loan eligibility.

He said:

• RBI has not mandated any cutoff in credit scores
• Credit scores are already part of lending decisions
• Each bank independently decides its risk appetite and lending criteria

According to him, credit scores are only one of several inputs used in underwriting decisions.

He added that while higher credit scores may be associated with better loan terms, such as lower interest rates and faster approvals, lower scores do not automatically result in rejection.

How will lending decisions work under ECL?

Experts clarified that the ECL framework is not expected to eliminate access to credit but may influence pricing and provisioning practices.

Satyam Kumar, CEO and Co-founder of LoanTap, stated that lending will continue, but pricing structures may be affected.

He explained:

• Banks currently make relatively lower provisions on performing loans
• Under ECL, provisioning requirements will increase
• The extent of provisioning will vary across asset classes such as home loans and car loans

He noted that expected credit loss estimates may lead to provisioning adjustments in the range of approximately 75 basis points to 1.5 per cent, depending on assumptions related to asset quality.

He added that this may impact lending margins and pricing structures for loan products.

He also pointed out that earlier, losses from certain loan segments could be adjusted across a bank’s balance sheet, but this internal adjustment mechanism may be reduced under the new framework.

Possible impact on interest rates and lending behaviour

Experts indicated that changes in provisioning norms may have a marginal impact on loan pricing. For example, home loan rates may see adjustments due to changes in provisioning requirements.

Banks are also expected to adopt more cautious risk assessment practices under the ECL framework.

'Credit score is not the only factor in loan decisions'

Experts emphasised that credit score is only one of multiple factors considered in lending decisions.

Banks also evaluate:

• income consistency
• employment stability
• repayment behaviour
• existing debt obligations
• collateral quality in secured loans
• overall borrower financial profile

With the growing use of India’s Account Aggregator framework, lenders can also access financial data such as bank statements, investment holdings, and cash flow information, subject to customer consent.

Concerns around credit scoring systems

The experts also highlighted structural concerns related to credit scoring systems.

Experts pointed to what they described as the “invisible borrower” issue, where individuals who have never taken loans may have low or no credit scores due to a lack of credit history.

It was noted that in such cases, financially disciplined individuals may still appear “risky” under traditional scoring models because borrowing history is limited or absent.

Accountability concerns regarding credit bureau systems

Harsh Roongta, Founder of Fee-Only Investment Advisory LLP, raised concerns regarding accountability in credit reporting systems.

He stated that credit bureaus were originally designed to serve lenders by reducing default risk and not primarily as consumer-centric systems.

He highlighted concerns, including:

• Lack of accountability for incorrect data
• Delays in correcting disputes
• Real-world impact of errors in credit reports
• Absence of penalties for inaccuracies

He compared this with international frameworks such as the Fair Credit Reporting Act, where institutions can be held accountable for incorrect reporting.

He stated that stronger safeguards are required in India for:

• data accuracy
• timely correction of errors
• accountability of lenders and credit bureaus

“Lazy banking” concern

Another concern discussed was the over-reliance on credit scores in lending decisions, described by experts as “lazy banking.”

According to this view:

• Some lenders depend heavily on bureau scores
• This may lead to rejection or higher pricing in some cases
• Broader financial behaviour may not always be fully considered

However, it was also noted that several lenders are increasingly using broader data-driven underwriting systems.

Challenges faced by first-time borrowers

The discussion also covered challenges faced by first-time borrowers. Many young professionals who have never taken loans may lack a credit history.

Experts clarified:

• Such borrowers are not automatically denied credit
• However, they may face additional scrutiny or pricing variations
• Use of broader data systems is gradually improving assessment accuracy

RBI's ECL framework seen as a structural reform

Despite concerns in public discourse, experts broadly described the ECL framework as a positive regulatory development.

They characterised the shift as moving from a system that recognises losses after they occur to one that anticipates risks in advance.

The framework was described as a preventive measure intended to improve banking stability.

Key takeaways

Experts clarified that the RBI’s Expected Credit Loss framework:

• Does not introduce any specific credit score requirement
• Does not impose a minimum credit score threshold for loans
• Does not restrict loan access for a majority of borrowers

Instead, it represents a shift in how banks assess and provision for credit risk.

According to experts:

• Loans will continue to be available
• Pricing may become more risk-sensitive
• Credit assessment will become broader and more data-driven