Banks Will Provide More for Bad Loans Before They Happen.
What Will New ECL Norms Cost?
Today, banks set aside money mainly after a loan goes bad, which means more than 90 days overdue. Until then a loan is a standard asset, and most carry a provision of just 0.40%, whether the borrower pays on time or is two months late.
From 1 April 2027, under directions the Reserve Bank of India (RBI) issued on 27 April 2026, banks must provide for the loss they expect on every loan from the day it is given. This is called expected credit loss (ECL).
Loans fall into three stages. Stage 1 is a loan being repaid normally, and the bank provides for the loss expected over the next 12 months. Stage 2 is a loan showing stress, such as a payment more than 30 days late, and the provision covers the full life of the loan. Stage 3 is a bad loan, covered in Banker’s Brief No. 005.
The RBI has also set minimum provisions, called floors. For a corporate loan, the Stage 1 floor is 0.40%, as today, and the Stage 2 floor is 5%, more than twelve times as much. Banks asked for a lower Stage 2 floor, and the RBI kept 5%.
The extra provisions come out of core capital. Crisil estimates the one-time cost at up to 120 basis points (bps) of common equity tier 1 (CET1) capital for most banks.
Provision on a ₹100 crore loan, today and from April 2027
Impact on a corporate loan
The gold bar is the new Stage 2 floor. It applies once a loan is more than 30 days overdue or its credit risk has risen significantly.
How expected credit loss works
Expected loss multiplies three estimates: the chance the borrower defaults (probability of default, PD), the share of the loan lost if that happens (loss given default, LGD), and the amount owed at that point (exposure at default, EAD). So ECL = PD × LGD × EAD. Banks must run this under several economic scenarios and weight each by its likelihood.
Each bank sets its own test for a significant rise in credit risk, using signals such as a rating downgrade. A loan more than 30 days overdue is presumed to be in Stage 2, and the bank needs documented evidence to keep it in Stage 1.
CET1 capital is mainly shareholders’ equity. A higher provision lowers retained earnings and so lowers CET1. Banks held a CET1 ratio of 15.3% in March 2026, and a cut of 120 bps would take it to 14.1%.
Interest will be recognised using the effective interest rate, which spreads processing fees over the life of a loan. New loans use it from 1 April 2027, and existing loans must move to it by 31 March 2030.
The floors and the capital cost
Minimum provisions by type of loan
Stage 1 and Stage 2 floors
| Loan type | Stage 1 | Stage 2 |
|---|---|---|
| Corporate loans | 0.40% | 5% |
| Medium enterprises | 0.40% | 5% |
| Small and micro enterprises | 0.25% | 5% |
| Farm credit | 0.25% | 5% |
| Housing loans to individuals | 0.25% | 1.50% |
| Unsecured retail loans | 1% | 5% |
Banks hold the higher of the floor and their own estimate.
Phasing in the capital cost
Share of the one-time cost banks may add back to CET1
The add-back is net of tax. A bank may finish sooner.
CET1 cost when other markets switched
One-time cost before any phase-in
| Market | Year | Cost | Basis |
|---|---|---|---|
| European Union | 2018 | 51 bps | Sample average |
| United Kingdom | 2018 | 34 bps | Barclays |
| Canada | 2017 | 15 bps | Scotiabank |
| Australia | 2018 | +2 bps | Westpac, ratio rose |
| United States | 2020 | 20 bps | CIT |
| India | 2027 | Up to 120 bps | Crisil estimate, net |
Bank figures are single-bank disclosures. The EU, UK and US allowed three to five-year phase-ins. Canada and Australia did not.
Frank TakeWhat the 5% floor changes
For most banks, the one-time capital cost looks manageable. The 90-day rule for bad loans stays, and those loans already carry large provisions. The bigger change is the Stage 2 floor. A loan a month overdue will now need at least 5%, and banks have usually treated these loans as routine collections.
How much of the book moves. Crisil puts Stage 2 loans at about 2% to 2.2% of the banking system. At a 5% floor in place of 0.40%, every ₹100 of these loans needs about ₹4.60 more in provisions. Stage 2 can grow beyond the overdue book, because banks must also move loans whose risk has risen in other ways, such as a rating downgrade.
Floors differ by product. Unsecured retail loans start at 1% in Stage 1 and go to 5% in Stage 2. Housing loans start at 0.25% and go to 1.50%. The provision a loan needs on the day it is given now depends on the product, so expected loss will show up in loan pricing.
How the cost reaches capital. The one-time adjustment is charged to retained earnings on 1 April 2027 and does not pass through the profit and loss account. Provisions banks already hold can absorb part of it, which is why Crisil’s net estimate is 50 bps lower than its gross estimate.
What other markets saw. European banks moved to expected loss in January 2018, and the European Banking Authority found the first-day cost averaged 51 bps of CET1. India’s estimate is higher, and the 5% Stage 2 floor is the likely main reason. The figures abroad are mostly single-bank disclosures, so the comparison is a guide only. The larger effect abroad came in 2020, when provisions rose as soon as economic forecasts worsened.
The test each bank sets for a significant rise in credit risk is what to watch. The 30-day rule is only the minimum. A bank that moves loans to Stage 2 early will show higher provisions in 2027 and fewer surprises later. Results for the quarter to 30 June 2027 will show which banks have done this.
Scan forthe archive
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