RBI Introduced ECL framework, effective April 1, 2027

Current Context: On 27 April 2026, the Reserve Bank of India (RBI) issued two landmark directives reshaping Indian banking.

• The Expected Credit Loss (ECL) framework will replace the incurred loss model from 1 April 2027, requiring banks to provision for future defaults.
• It introduces a three‑stage model:
• Stage‑1: Standard assets → 12‑month ECL.
• Stage‑2: Significant credit risk → Lifetime ECL with 5% provisioning floor.
• Stage‑3: Credit‑impaired assets → Lifetime ECL.
• The 5% Stage‑2 floor is a sharp jump from the current ~0.40%, ensuring stronger buffers.
• Banks are given a four‑year transition window till 31 March 2031 to absorb the capital impact gradually.
• Simultaneously, RBI mandated phased reporting of offshore Foreign Exchange (FX) derivatives by Authorised Dealer Category‑I (AD Cat‑I) banks.
• The rollout begins 1 July 2027 (70% reporting), moves to Jan 2028 (80%), and reaches full compliance by July 2028.
• These reforms aim to strengthen credit risk management, enhance transparency in rupee trades, and align Indian banks with global financial standards.

Question:

Q.1 The Reserve Bank of India (RBI) has prescribed a minimum provisioning floor of ___ under Stage-2 of the Expected Credit Loss (ECL) framework:
a) 1%
b) 2%
c) 7%
d) 5%

Answer: d) RBI mandates a minimum 5% provisioning for Stage-2 assets.