In January, the Reserve Bank of India (RBI) released a discussion paper on the expected loss-based approach for loan loss provisioning. Last week, the government asked public sector banks to conduct a detailed study on the impact of such a norm on their capital position.
At present, banks make provisions on incurred loss, that is, once an account is overdue for more than 90 days, they set aside capital, known as provision.
In the expected loss model, banks need to make provision once an account shows signs of stress, even if the account is standard.
This would result in an increase in banks' capital requirement as they have to make provision for certain standard assets that are showing signs of stress.
In the discussion paper, the RBI said banks will be given one year to prepare themselves before implementing the framework. The regulator is open to the idea of giving banks five years to spread the provisioning requirement.
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