New Era of "Expected Credit Loss Provisioning" in Indian Banking Sector

Abstract

Subsequent to “Great Financial Crisis”, the Accounting Standard (AS) Developers have an obligatory that the Banks and other Business Organizations have to provide the Provisions against the Loans portfolio on “Expected Credit Losses”. Banks must provide provisions for ‘Expected Credit Losses’ from the Time of Loan Sanctioned or Disbursed, not awaiting the Loan Turn into NPA or “Trigger Events” which gives alert for impending losses of the Banks or Financial Institutions.

In Simple Terms, the Provisions may give scope to reduce the impact on “Regulatory Capital i.e., Capital Adequacy of Banks” is Expected to be Limited or Nominal. But, these New Rules of Expected Credit Loss Provisions are likely to change the behaviour of the Banks and Financial Institutions in Credit Recessions, Potentially Diminishing Procyclicality of the Banks or Financial Institutions in the Long Run.

Banks, Regulators and Market Participants are to prepare for their respective Roles and Responsibilities while Implementing this“New Approach”of ECL and Measuring its Impact on Balance Sheet / Financial Statements etc.