PSU Bank Stocks Fall In Early Trade As RBI Sticks To ECL Timeline

Shares of public sector banks declined on 28 April in early trade after the Reserve Bank of India (RBI) refused to extend the timeline for shifting to the expected credit loss (ECL)-based provisioning system. Bank of India, Union Bank of India, and other PSU lenders fell up to 2.5% in early trade.

At 12:08 pm, Bank of India and Union Bank of India shares were down by 2.20% and 3.45%, respectively on the National Stock Exchange (NSE). During the same time, the Nifty PSU Bank Index was down 1.91%.

Shift To ECL Framework Behind Decline

Industry observers attributed the decline to the Reserve Bank of India’s shift to the ECL model. Note that the RBI, in its final ‘Directions on Asset Classification, Provisioning, and Income Recognition for Commercial Banks’, said it will implement the ECL framework from 1 April next year. ​

Banks had sought more time to prepare for the shift, citing the need to build databases, develop models, and upgrade systems. The central bank declined the request. It said lenders had already been given a one-year timeline to get ready after the draft was issued on 7 October 2025.

Identifying Losses In Advance

Under the current system, banks make provisions only after a loss is incurred. The ECL model requires lenders to recognise potential losses in advance. This is expected to increase provisioning levels across the system. The RBI said it has introduced measures to ease the transition. These include:

• A calibrated transition framework for capital impact

• Transitional arrangements for one-time impact due to the ECL shift

• Three-year timeline for applying the Effective Interest Rate (EIR) on legacy loans

• Guidance on key implementation aspects

Despite these steps, the decision to hold the timeline triggered a reaction in bank stocks.

RBI Rejects Key Feedback On NPAs

Also, the RBI rejected a proposal to remove references to non-performing assets (NPAs). It said the NPA classification system is widely understood and remains embedded in regulatory frameworks.

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On calls for more detailed guidance, the RBI said ECL is principle-based and depends on each bank’s internal assessment. However, it accepted some suggestions while finalising the guidelines, including:

• Floor for individual housing loans under Stage 1 reduced to 0.25%

• A separate category has been created for state government exposures

• Stage 2 provisioning floor set at 2.5%

For Purchased or Originated Credit Impaired (POCI) assets, the RBI clarified that these will be treated as a separate category with lifetime ECL recognition.

On EIR implementation, the central bank did not allow full prospective application. However, it gave banks three years to transition existing loan accounts.

Sources:

Moneycontrol

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