The ECL Reckoning: Which Indian Banks Face the Hardest Hit to Capital?

Key Takeaways

• The RBI on April 27, 2026, issued final guidelines for an Expected Credit Loss (ECL)-based loan loss provisioning framework, replacing the current incurred loss approach, with the new norms effective from April 1, 2027.

• The RBI had first issued draft ECL norms in October 2025. Following stakeholder feedback, the final directions have now been released with no reduction in the provisioning floors banks had requested. 

India's Banks Are Entering a New Era of Credit Risk Accounting

The RBI's ECL framework marks a significant structural shift in how banks recognise and provide for credit risk. 

Under the new three-stage model, banks must estimate future losses using probability of default, loss given default, and exposure at default replacing the old approach where losses were recognised only after a default occurred. 

Banks had asked for a reduction in prudential ECL floors, but the RBI has not acceded to their demands, said Suresh Ganapathy, MD and Head of Financial Services Research at Macquarie Research. 

The short-term impact is real and uneven. 

An additional provision of approximately ₹18,000 crore for Special Mention Accounts and ₹42,000 crore for NPAs will be required, leading to a total first-hit to bank P&Ls of at least ₹60,000 crore in aggregate. 

While a five-year glide path to FY2031 softens the blow, the provisioning still flows through the profit and loss account not just the capital statement. 

Capital Impact Across India's Banking Sector: The Numbers That Matter

The scale of impact varies significantly by bank type, loan mix, and existing provision buffers. 

The table below captures analysts' estimates of the CET-1 and net worth impact across categories.

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Stage 2 loans overdue by 60-90 days will now attract a minimum provisioning of 500 basis points under ECL, compared with roughly 40 basis points currently for standard assets.

For PSU banks with thin contingent provision buffers, this is a material step-up.

What This Means for Investors and Depositors Across India

Large private sector banks are likely to be better placed, with existing provision buffers of 2–4% of net worth already absorbing much of the transition impact. 

PSU banks generally hold lower additional provisions and will need to build those up significantly. 

For retail investors holding PSU bank stocks, this translates into potential earnings pressure from FY28 onwards, even if short-term fundamentals remain stable.

Banks with higher exposure to unsecured and microfinance loans are expected to face a greater provisioning burden. 

However, analysts at Emkay Research noted that reduced risk weights under the new standardised approach for credit risk will benefit HDFC Bank, ICICI Bank, and SBI Card in the long run.

Analysts: The Pain Is Manageable, Yet Unevenly Distributed

Macquarie Research said it expects the transition, even for PSU banks, to be smooth, given the time provided, but cautioned that the earnings impact from FY28 onwards could be higher than for private-sector peers. 

Motilal Oswal noted that PSU banks' strong asset quality performance over the past few years may limit the overall capital erosion.

European banks experienced an average CET1 impact of 10–50 basis points when IFRS 9 was implemented in 2018. 

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The US saw a steeper 30–70 basis point hit. India's five-year glide path is designed to prevent a repeat of that volatility. 

Banks that act early, building provision buffers now rather than waiting until April 2027, will be best positioned to absorb the transition.

Conclusion

The ECL framework is the most significant shift in Indian banking regulation in decades. Banks that treat this as a governance upgrade, not just a compliance exercise, will emerge with stronger credit cultures, better capital discipline, and the resilience to withstand the next credit cycle. 

FAQs

How do banks treat the rich? 

The rich receive bespoke, “white-glove” service from banks, characterised by dedicated private bankers, waived fees, and preferential, low-interest asset-backed loans. 

In which Indian banks should people not keep their money?  

To ensure safety, avoid keeping large sums (>₹5 lakh) in poorly managed cooperative banks, smaller rural banks, or entities with high Non-Performing Assets (NPAs).