New Bad-Loan Rules May Hit Banks By 120 Bps, Impact Lending Strategy

Banks may face a one-time capital hit under new bad-loan rules, but early provisioning could make the lending system safer by 2027.

Key Takeaways

1. New ECL norms from April 1, 2027 may reduce banks’ CET-1 ratio by up to 120 bps on a net basis.
2. The earlier update came when PNB estimated a ₹90 billion transition hit under the new credit-loss framework.

New Bad-Loan Rules Could Hit Profits In The Short Run

Indian banks are heading for a major provisioning shift as the new Expected Credit Loss framework kicks in from April 1, 2027. Under this system, banks will set aside money for possible future defaults instead of waiting for stress to appear. Reuters reported on April 27, 2026 that the 90-day NPA rule will continue, but provisioning will become more forward-looking.

In the short term, this can reduce reported profits and capital buffers. In the long term, it can force banks to spot weak loans earlier. LoansJagat reported that the rule could shake up lending because banks may become more cautious before giving fresh loans, especially to risky borrowers.

CRISIL Ratings said on April 30, 2026 that the rules may lead to a gross CET-1 impact of up to 170 bps and a net impact of up to 120 bps after existing provisions and buffers. Banks can spread this transition cost across 4 fiscals, which softens the immediate pressure.

Why Borrowers And Depositors Should Track This Shift?

For borrowers, the first impact may show up in tougher loan checks. Weak credit profiles, unsecured loans, SME loans and stressed accounts may see stricter scrutiny. Banks may price risky loans more carefully because future losses will need earlier provisioning.

The positive side is depositor safety and better bank books. CRISIL said the biggest incremental impact will come from Stage 2 assets, where the provisioning floor rises to 5% from 0.4% for most asset classes. But SMA 1+2 assets are only around 2-2.2%, so the sector-level impact looks contained. 

The burden may also be partly offset by new risk-weight norms. Economic Times reported that qualifying regulatory retail exposures may attract a 75% risk weight, while individual housing loans may carry LTV-linked risk weights of 20-40% from April 2027.

Experts Say PSU Banks May Feel A Bigger Pinch

Dolat Capital’s Punit Bahlani told ET Markets on April 29, 2026 that PSU banks may see a recurring credit-cost impact of 15-25 bps. Bank of Baroda had earlier indicated around 20 bps, while SBI may be closer to 15 bps because of stronger asset quality.

Dinesh Kumar Khara, former SBI chairman, told ET that banks are ready for the ECL shift and the impact is manageable. The practical solution for banks is faster stress detection, stronger contingency provisions and tighter risk pricing before FY27 reporting begins.

The previous big signal came from PNB. Reuters reported on October 20, 2025 that PNB expected a ₹90 billiontransition impact, equal to around 0.85 percentage points of CRAR. PNB’s CRAR was 17.19% as of September 30, 2025, while Q2 profit stood at ₹49.04 billion, up 14%.

Conclusion

The new bad-loan rules may hurt bank capital once, but they can improve early warning systems. The sharper test will be for PSU banks and lenders with thin provision buffers.

FAQs

Will RBI’s new bad-loan rules make Indian banks safer or reduce loan availability?

RBI’s new bad-loan rules may make Indian banks safer in the long run. Banks will have to keep money aside for possible future loan losses, not only after a borrower defaults. This means weak loans can be identified earlier. In the short term, banks may see lower profits and some pressure on capital. 

Risky borrowers, small businesses or people with weak credit scores may face stricter checks. However, depositors and the overall banking system may benefit because banks will carry cleaner loan books and fewer hidden bad loans. So, lending may become tougher, but banking stability can improve.

Why are some companies not eligible for loan restructuring under RBI rules?

Some companies may be excluded from loan restructuring because RBI sets strict rules to prevent misuse of relief schemes. The loan recast facility is usually meant for businesses that are facing temporary stress but still have a chance to recover. 

Companies already classified as wilful defaulters, fraud accounts, or those with very weak repayment ability may not qualify. RBI also wants banks to avoid evergreening of loans, where bad loans are repeatedly restructured to hide stress. These norms help protect banks, depositors and the financial system, even if some stressed companies miss out on relief.