Reserve Bank floats paper on credit-loss provisions

The Reserve Bank of India (RBI) is working on a set of guidelines for expected credit-loss provisions for banks to align its rules with the global regulatory framework.

- Shayan Ghosh & Gopika Gopakumar

In a discussion paper released on Monday, the central bank said banks can have their own models to measure expected credit-loss provisions but must independently verify them using sound reasoning and relevant data available with the bank, besides carrying out a proper back-testing to remove bias.

However, RBI may still prescribe a threshold on the provisions on the basis of comprehensive data analysis even after a bank conducts an internal assessment. Currently, banks are mandated to make loan loss provisions based on incurred losses, which till recently, used to be the standard globally. Under the system, banks would provide for the losses incurred.