CA Sansaar
RBI tightens bad loan rules to align with global norms
Print
The Reserve Bank of India (RBI) has rejigged the rules governing classification of bad loans, definition, and recovery, to align with globally-accepted standards, effective April 1, 2027, according to the Master Directions released on Monday (April 27, 2026).
“These Directions are intended to further strengthen credit risk management practices, improve comparability across regulated entities, and align the regulatory framework more closely with internationally accepted financial reporting principles,” the central bank said in its Master Directions.
According to the new rule, if one loan of a borrower with many loans is considered Non-Profitable Asset, all the loans will also be considered NPA. The basis for classifying a loan as NPA, however, remains at 90 days overdue.
An NPA borrower will be considered a “standard asset” only “on repayment of entire arrears of interest and principal pertaining to all the credit facilities,” as per the revised norms. The new regulation also directed banks to establish automated systems to identify NPAs, a move from the older ways when banks tagged NPAs manually.
The new framework, called the Expected Credit Loss (ECL), will calculate loss allowance based on three stages, ranging from no or low credit risk, a significant increase in credit risk, and the final stage being credit impaired. The new method is stricter compared to the earlier method, called the Incurred Loss, where provisions are created only after a loan has been recorded as 90 day overdue.
The RBI also introduced the effective interest rate as a measure to calculate ECL, a change from the earlier contractual interest rate. The EIR shall be estimated based on the expected cash flows by considering all the contractual terms of the financial instrument except the potential credit loss.
While loans beginning April 1, 2027, will come under the EIR regime, banks have been given time to change their legacy loans to the new method by March 31, 2030.
The tightening of NPA regulations comes in the background of decadal lows in the NPA ratio of banks.
“These Directions are intended to further strengthen credit risk management practices, improve comparability across regulated entities, and align the regulatory framework more closely with internationally accepted financial reporting principles,” the central bank said in its Master Directions.
According to the new rule, if one loan of a borrower with many loans is considered Non-Profitable Asset, all the loans will also be considered NPA. The basis for classifying a loan as NPA, however, remains at 90 days overdue.
An NPA borrower will be considered a “standard asset” only “on repayment of entire arrears of interest and principal pertaining to all the credit facilities,” as per the revised norms. The new regulation also directed banks to establish automated systems to identify NPAs, a move from the older ways when banks tagged NPAs manually.
The new framework, called the Expected Credit Loss (ECL), will calculate loss allowance based on three stages, ranging from no or low credit risk, a significant increase in credit risk, and the final stage being credit impaired. The new method is stricter compared to the earlier method, called the Incurred Loss, where provisions are created only after a loan has been recorded as 90 day overdue.
The RBI also introduced the effective interest rate as a measure to calculate ECL, a change from the earlier contractual interest rate. The EIR shall be estimated based on the expected cash flows by considering all the contractual terms of the financial instrument except the potential credit loss.
While loans beginning April 1, 2027, will come under the EIR regime, banks have been given time to change their legacy loans to the new method by March 31, 2030.
The tightening of NPA regulations comes in the background of decadal lows in the NPA ratio of banks.
Category : RBI | Comments : 0 | Hits : 65
Comments