SBI, Canara Bank, BoB: PSU bank shares fall over 3% post-ECL norms update; all you need to know

On Monday, the Reserve Bank of India (RBI) declined pleas for more time to transition to the expected credit loss (ECL)-based provisioning, making it clear that the newer system will be implemented from April 1 next year.

In the ‘Directions on Asset Classification, Provisioning, and Income Recognition for Commercial Banks’, the RBI said banks had given feedback seeking more time for the transition as they needed to build databases and models and upgrade systems.

Declining to accept the feedback on the draft first issued on October 7, 2025, the RBI said, “Banks have been provided a one-year timeline to prepare their internal systems for implementation of the new framework.”

How shares are performing

When last seen, the NIFTY PSU Bank index was trading 1.87% lower at 8,687.75 levels, with all 12 constituents trading in the red.

The top losers were State Bank of India (SBI) – down 1.48%; Union Bank of India – down over 3%; Canara Bank – down 2.78%; and Bank of Baroda (BoB) – down 1.71%.

ECL: Key details

At present, banks make a provision against an asset once the loss is incurred, while under ECL, they will move to a much more proactive system. It is widely believed to increase the provisions in the banking system.

The central bank also said on Monday that it has provided some measures to ease the transition to ECL, including the provision of a calibrated transition framework, including transitional arrangements for a one-time capital impact on account of ECL transition, a three-year timeline for application of Effective Interest Rate (EIR) on legacy loan accounts, and guidance provided on key implementation issues.

Similarly, the RBI has also not accepted feedback to omit a reference to non-performing assets (NPAs) as non-feasible.

"NPA classification is an objective and well-established framework that is widely understood and recognised by stakeholders, including lenders and borrowers. It is also embedded across multiple statutory and regulatory frameworks," the RBI said.

What the RBI has said

The RBI said it had received feedback wherein detailed guidance was sought to implement the framework but declined the same, stating that ECL is inherently principle-based and requires institution-specific risk assessment.

"Banks differ materially in terms of portfolio composition, business models, customer segments, data availability, etc., and therefore, a uniform and highly granular implementation framework will not be appropriate across all banks," it said.

The RBI has also accepted or partially accepted the feedback it has received on some of the suggestions first proposed in the draft by making necessary changes in the final directions.

Floor categories

It accepted the feedback of maintaining the floor for individual housing loans under Stage 1 at par with the existing standard asset provisioning but reducing the same to 0.25%.

A separate floor category has been created containing exposures for direct lending to state governments and specific state government-guaranteed exposures, and a Stage 2 floor at 2.5% has been prescribed as per the feedback received, the RBI said.

In the case of Purchased or Originated Credit Impaired Assets (POCI), it was submitted that such assets are not considered in any of the stages globally, and classification as Stage 1 suggested in the draft may not be appropriate.

"The guidelines have been amended to clarify that POCI shall be treated as a separate category with recognition of lifetime ECL," the RBI added.

There have been some partial acceptances of feedback, like in the case of EIR, where the submission for the prospective application of EIR has not been accepted, but a timeline of three years is being provided to the banks for transition to EIR-based income recognition for loans outstanding as of the date of transition.

What investors need to know

The proposed Expected Credit Loss (ECL) norms by the RBI, according to analysts, are seen as slightly negative for PSU banks in the near term, as they require lenders to make provisions in advance based on expected future losses rather than waiting for loans to turn bad.

This shift to a forward-looking approach is likely to lead to higher upfront provisioning, especially for PSU banks that typically have relatively weaker asset quality and higher exposure to stressed sectors.

As a result, profitability may come under pressure, while lower retained earnings could also strain capital positions, potentially necessitating additional capital support.

Further, earnings could become more volatile due to dependence on economic assumptions and risk models.

In comparison, private sector banks are better placed to absorb the transition, given stronger balance sheets and risk frameworks.

However, over the long term, the move is expected to improve transparency, strengthen risk management, and enhance the overall resilience of the banking system.

What CITI has said

Analysts at CITI note that while the RBI’s ECL framework strengthens the banking system by making provisioning more forward-looking, they believe the transition will create winners and losers, with housing-focused lenders benefiting and PSU banks and risk-heavy portfolios facing near-term headwinds.

The leading investment firm noted that RBI has mandated a transition to the ECL framework for scheduled commercial banks (excluding small finance and payment banks) effective April 1, 2027, marking a shift to a forward-looking provisioning regime.

Key changes in the ECL framework

Stage-1 provisioning has been aligned at 40 basis points, similar to standard asset norms, but lowered to 25 bps for individual home loans and certain guaranteed loans. For unsecured retail loans, the requirement remains higher at 1%.

The stage-2 provisioning floor has been retained at 5% for most segments, while lower levels apply to housing and certain secured loans.

For Stage-3 assets, provisioning varies depending on the age of the loan, with stricter norms for unsecured retail exposures.

A glide path until March 31, 2031, has been provided to ease the transition impact on banks.

Banks will be required to fair value their entire loan book at the time of transition.

The earlier proposal requiring a six-month seasoning period in Stage-2 before upgrading to Stage-1 has been removed.

Impact: Divergence across banks

According to Citi, the framework is net positive for banks with higher exposure to home loans, given relatively lower provisioning requirements for such portfolios.

However, the impact could be adverse for lenders with higher exposure to riskier segments, particularly:

• Unsecured retail loans

• Microfinance (MFI)

• Vehicle finance

• Banks with higher 30–90 days past due (DPD) buckets

Public sector banks (PSBs), which typically have higher exposure to stressed and unsecured segments, may see relatively greater pressure on earnings and capital under the new norms.