RBI’s new ECL norms to have manageable impact on Indian banks, says Fitch

Indian banks are well placed to absorb the impact of the Reserve Bank of India’s expected credit loss (ECL) provisioning framework, with the transition likely to have a manageable effect on capital and profitability while reinforcing regulatory reform, Fitch Ratings has said.

The ratings agency said the RBI’s finalised ECL framework, which takes effect from April 1, 2027, supports the positive outlook on Fitch’s ‘bb+’ operating environment (OE) score for Indian banks and is broadly in line with its expectations.

The framework gives banks some flexibility in setting assumptions to estimate expected credit losses, although RBI’s product-wise prudential provision floors and close supervisory oversight should support prudent implementation, Fitch said.

“ECL adoption could also strengthen underwriting and risk controls, and may ultimately support banks’ risk profile scores,” the agency said.

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Fitch estimated that the banking system’s average common equity Tier 1 (CET1) ratio will decline by 30 basis points in the financial year ending March 2028, with the decline likely to extend gradually to about 80 basis points by FY32 if banks use the RBI’s four-year transition mechanism.

The agency said this was lower than its previous estimate of about 55 basis points in the first year of transition and about 100 basis points by the end of the transition.

Fitch also estimated the sector’s operating profit-to-risk weighted asset ratio will decline by about 10 basis points under the ECL framework due to a similar increase in credit costs, below its earlier estimate of 20 basis points.

The lower impact mainly reflects stronger starting provision buffers than previously assumed, Fitch said. It estimated the sector’s non-performing loan provision coverage ratio rose to 77% in the first nine months of FY26 from 75% in FY24, reducing Stage 3 provision needs.

Lower non-performing loan generation and better recovery rates have also reduced the impact, while banks are entering the transition from a position of strength, with sector earnings and capital buffers close to cyclical highs, the agency added.

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The impact is likely to vary by bank type. Fitch estimated the impact on state banks’ CET1 ratios at around 45 basis points in FY28, extending to about 140 basis points by FY32.

The impact on private banks should be much lower, at 10 basis points in FY28 and rising to around 25 basis points by FY32, reflecting better loan recoveries and lower expected losses under the ECL framework.

Fitch said Indian banks’ OE score could be raised if the RBI sustains the reform momentum of the past decade and India’s economic growth prospects remain intact.

“ECL adoption should also help reduce earnings volatility through the cycle and lower the risk of protracted asset quality deterioration,” it said, while cautioning that a prolonged conflict in the Middle East could delay an upward revision of the OE score.