Bank Loan (File Photo)
Business News: Recently, the Reserve Bank of India (RBI) made a significant decision regarding private banks. Under this, the Expected Credit Loss (ECL) rules will come into effect from April 1, 2027. ECL refers to a method for estimating potential credit losses. This means that banks will be able to anticipate how many loans could become bad in the future and how much they could lose. Previously, banks only made provisions after a loan default. However, under the new rule, banks will be required to make provisions for potential losses in advance. This will enable banks to manage risk more accurately.
The RBI has also lifted the proposed ban on business overlap between banks and their affiliated companies. This means that banks can now conduct normal business with their affiliated companies.
If ECL is implemented, banks will have to raise funds in advance to cover potential losses. This could directly impact interest rates and make loans more expensive.
However, this will not apply to all banks. According to an ET report, large private banks like HDFC, ICICI, and Axis will be less affected. In many cases, this change may even prove beneficial for them because they already have adequate floating and emergency provisions.
For example:
Smaller banks and those with higher past NPAs may be more affected by the implementation of ECL.
The RBI has given private banks until 2031 to prepare for the new ECL rules. This will allow larger banks to gradually build provisions based on their past credit losses, reducing the risk of sudden loan increases. The new ECL rules are an effort to strengthen risk management for private banks. Larger banks will be less affected, while smaller banks or those with higher NPAs may feel some pressure. Loan prices are likely to become more expensive, but the impact will not be the same for all banks.
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