Banks need to be ready for likely defaults

Mumbai: The RBI will come out with a framework on expected credit loss for banks. This is a progression from the current practice of making provisions on the basis of incurred losses.

Speaking at a ‘Banking and Finance Conference’ organised by IMC Chamber of Commerce and Industry, RBI deputy governor M Rajeshwar Rao said that the central bank will soon come out with a discussion paper on the framework on expected credit loss model. Although banks do not divulge expected credit loss, some listed lenders do give a guidance on their likely credit costs for the year ahead.

Rao said that the discussion paper would take into account feedback from the business community. Rao said that the restructured loans in the books of banks has increased significantly in the aftermath of the pandemic. Banks have already made provisions on stressed as well as restructured accounts, he said resulting in the provision coverage ratio of the banking sector improving from 77% in September 2019 to 86.8% in March 2022.

“Most banks have comfortable capital positions and are well positioned to support economic recovery,” said Rao.