RBI mulling to adopt "expected loss" approach for banks' loan provisioning

At present, larger non-bank lenders have already been using the expected loss approach for provisioning since 2018.

Banks were also expected to follow the expected loss approach in 2018 itself, but it had not been implemented because certain necessary amendments to the Banking Regulation Act was pending. Pic: Reuters

Governor Shaktikanta Das on Friday said the Reserve Bank is mulling to adopt the "expected loss" approach for loan provisioning.

At present, the banks follow the "incurred loss" approach, where money is set aside after an asset turns sour.

Das called the proposed transition a "more prudent and forward looking approach", and said that a discussion paper will be released soon for stakeholders to comment on the same.

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"We will release a discussion paper on 'expected loss-based approach' for loan loss provisioning by banks," the Governor said after announcing the bi-monthly policy review.

He said the approach to make provisions or set aside money on the probable losses is a globally accepted prudent norm.

At present, larger non-bank lenders have already been using the expected loss approach for provisioning since 2018.

Banks were also expected to follow the expected loss approach in 2018 itself, but it had not been implemented because certain necessary amendments to the Banking Regulation Act was pending.

Meanwhile, Das also announced that the RBI will be releasing another discussion paper on a revised framework for securitisation of stressed assets after overhauling the same for standard assets in September 2021.

"It has now been decided to introduce a framework for securitisation of stressed assets. This will provide an alternative mechanism for securitisation of NPAs in addition to the existing ARC (asset reconstruction companies) route," Das said.

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