Expected Credit Loss Norms

Context: 

Banks have sought a one-year extension from the Reserve Bank of India (RBI) for implementation of the Expected Credit Loss (ECL)-based loan loss provisioning framework.

About Expected Credit Loss (ECL):

• Risk accounting method: ECL is a method of accounting for credit risk based on the loss likely to occur on a loan or portfolio of loans.  
• Future loss identification: It is used to get an understanding of the potential future losses on financial assets and how those losses can be identified and addressed in the financial statements. 
• Checking default probability: Through ECL, banks can estimate the forward-looking probability of default for each loan, and then by multiplying that probability by the likely loss given default, the bank gets the percentage loss that is expected to occur if the borrower defaults. 
• Classification of financial assets: 

• • Banks will be required to classify financial assets (primarily loans, including irrevocable loan commitments, and investments classified as held-to-maturity or available-for-sale) into one of the three categories – Stage 1, Stage 2, and Stage 3, depending upon the assessed credit losses on them. 
• Classification is required at the time of initial recognition as well as on each subsequent reporting date and make necessary provisions.                                                                                                                             

News Source: Indian Express