Understanding Mechanisms of Expected Credit Loss (ECL) Based Provisioning of Bank Loan

Abstract

Following the global trend, RBI is going to introduce Expected Credit Loss based provisioning system in Indian banks. In contrast to the present system of provisioning on actual losses, ECL provisioning is a forward-looking approach where provisions are made not only for actual losses but also for losses that may occur in future. It is a scientific technique which will help the banks to capture their credit losses more accurately and to make provisions accordingly. It will make the banks stronger. The system, once implemented, will change bankers’ age-old concept on asset classification and provisioning that is in vogue since last three decades. But designing the new system itself is a challenge for the banks which need to be overcome by proper understanding the process, communication and transparency.