RBI reforms allow banks to benefit from economic growth prospects: S&P

S&P Global Ratings has said the Reserve Bank of India’s (RBI) proposal to implement an expected credit loss (ECL) framework and revised Basel III norms reflects strategic timing, allowing banks to benefit from economic growth prospects.

It said the implementation of ECL by April 1, 2027, with a five-year transition, will give banks time to fine-tune their models, gather data, and smooth out the impact of ECL provisioning on profitability and capital.

S&P said higher capital ratios anticipated under Basel III reforms can cushion ECL provisions. It said credit availability will also be eased for large corporates, including for acquisition financing and operational infrastructure projects.

It added that relaxation of regulatory guardrails in certain areas could also incentivise some borrowers to pivot toward cheaper bank financing versus markets such as private credit, potentially reshaping credit demand dynamics.

Recently, the RBI released draft norms on ECL-based provisioning for banks' stressed loans, which will replace the current incurred loss-based norms that banks use to make provisions. The RBI plans to apply the ECL framework from April 1, 2027, moving away from the existing incurred-loss provisioning system and bringing India into line with international standards.

Banks will be allowed to smooth out provisioning adjustments until March 2031. The RBI also proposed several other measures that enhance credit flow to the economy. These include relaxation of risk weights to certain sectors, such as unrated micro, small and medium enterprises (MSMEs) and residential real estate.

Experts believe, the relaxed rules could make MSME lending more accessible and could be margin accretive for the banks as well. RBI’s decision to relax rules is also considered an effort to bring back the credit growth above strong double digits, which is currently stable at high single digits.