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Expected Credit Loss (ECL) Regime

News: India Ratings and Research, a credit rating agency, has stated that banks will have enough time and financial resources to withstand the effects of the switch to the projected credit loss regime.

The Reserve Bank of India (RBI) recently advocated switching the banking system from a “incurred loss” strategy to one that bases provisioning on predicted credit losses.

A loan loss provision is an expense that banks make aside for unpaid loans, according to the RBI.

Banks set aside a portion of the anticipated loan repayments from all of the loans in their portfolio to either fully or partially cover the losses.

In the case of a loss, the bank may use its loan loss reserves to cover the loss rather than recording a loss in its cash flows.

The amount of loan loss provision is chosen based on what is thought to be necessary to safeguard the bank’s stability and safety.

A bank is obligated to estimate expected credit losses under the expected credit loss (ECL) regime rather than waiting for actual credit losses to occur before making corresponding loss provisions.

According to the suggested framework, banks will have to categorize financial assets, mostly loans, as Stage 1, Stage 2, or Stage 3 depending on their credit risk profile, with Stage 2 and Stage 3 loans having larger provisions based on past credit loss patterns seen by banks.

The amount of loan loss provision is chosen based on what is thought to be necessary to safeguard the bank’s stability and safety.

A bank is obligated to estimate expected credit losses under the expected credit loss (ECL) regime rather than waiting for actual credit losses to occur before making corresponding loss provisions.

According to the suggested framework, banks will have to categorize financial assets, mostly loans, as Stage 1, Stage 2, or Stage 3 depending on their credit risk profile, with Stage 2 and Stage 3 loans having larger provisions based on past credit loss patterns seen by banks.