Indian banks well placed for expected credit loss provisioning in FY27: Fitch Ratings

New Delhi: Indian banks are adequately capitalised and remain well-positioned to transition to the Reserve Bank of India's (RBI) expected credit loss (ECL) framework from April 1, 2027, according to a report by Fitch Ratings.

The global ratings agency said the shift to the ECL-based provisioning regime is unlikely to create significant stress for the Indian banking sector, as lenders have already strengthened their balance sheets and improved provisioning buffers over the last few years.

The report noted, "The Reserve Bank of India's (RBI) recently finalised expected credit loss (ECL) provisioning framework will have a manageable impact on Indian banks while reinforcing regulatory reform."

The RBI had finalised the new norms last month, replacing the current incurred-loss approach with an ECL model that requires banks to provide for potential loan losses in advance. The framework aligns Indian banking regulations with global standards followed in several advanced financial markets.

Fitch said Indian banks are sufficiently capitalised to absorb the transition impact, noting that the sector has built stronger reserves amid improved asset quality and healthy profitability.

According to the report, the banking system's average common equity tier-1 (CET1) ratio could decline by around 30 basis points in FY28 after implementation of the framework. Fitch further estimated that the cumulative decline may widen to nearly 80 basis points over the transition period if banks utilise the RBI's four-year glide path.

However, the agency added that "starting provisions of banks are higher than expected," which would help cushion the impact of the new rules.

The report also said the finalisation of the ECL norms supports Fitch's positive outlook on the operating environment for Indian banks, reflecting improving regulatory oversight and stronger risk management practices in the sector.

The ECL framework is expected to improve transparency in recognising credit stress and encourage earlier provisioning against potential defaults. The report believes that the central bank move will strengthen long-term resilience in India's banking system, even though it may initially exert some pressure on profitability and capital ratios. (ANI)