Banks Lobby RBI: Massive Loan Provisioning Rule Change Brewing! Will Profits Skyrocket?

Commercial banks are preparing to lobby the Reserve Bank of India (RBI) regarding the draft Expected Credit Loss (ECL) framework for loan-loss provisioning. A key point of contention is the proposed minimum provisioning requirement for Stage-II loans. Currently, under the incurred-loss regime, banks typically provision around 0.4% for such loans, which often include Special Mention Accounts 1 or 2 (SMA1/SMA2). The RBI's draft ECL framework, however, has set a floor of 5% for Stage-II loan provisioning. Banks argue this substantial increase to 5% will disproportionately hit their profitability and capital adequacy. They are seeking the RBI to lower this minimum requirement, suggesting a figure closer to the current provisioning levels.

Difficult Terms: * **Provisioning**: Banks set aside a portion of their profits as a reserve to cover potential losses from loans that might default. * **Stage-II loans**: Loans that have experienced a significant increase in credit risk since they were initially granted, but are not yet considered defaulted. These often include accounts showing early signs of stress. * **Expected Credit Loss (ECL)**: A forward-looking accounting standard that requires banks to estimate and account for potential loan losses over the life of the loan, rather than waiting for a loss to be incurred. * **Incurred-loss regime**: The current system where provisions are made only when a loss is incurred or is highly probable. * **Special Mention Accounts (SMA1/SMA2)**: Categorizations for loans that are becoming delinquent. SMA1 loans are overdue between 1 to 30 days, while SMA2 loans are overdue between 31 to 60 days. * **Loan exposure**: The total amount of money a bank has lent out to a borrower.

**Impact**: This news is highly relevant to the Indian banking sector. A change in provisioning rules directly affects banks' profitability, balance sheets, and potentially their stock market valuations. Investors closely watch such regulatory discussions as they can lead to significant shifts in financial performance for major banks. Rating: 8/10.