The Reserve Bank of India on Tuesday issued a draft circular on the expected credit loss (ECL) framework. The proposed guidelines will replace the incurred-loss-based provisioning framework with an ECL-based provisioning, where they have to classify financial assets into different stages depending on the assessed credit losses at the time of initial recognition and on the further reporting dates.

“These directions are expected to further strengthen credit risk management practices, promote greater comparability across financial institutions, and align regulatory norms with internationally accepted financial reporting norms,” said RBI.

Introduction of Staging Criteria for Asset Classification

The central bank introduced staging criteria for asset classification under the ECL approach,

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