SBI, PNB, HDFC Bank: Financial stocks trade lower after RBI proposes credit risk norm changes; all you need to know

Last seen, the NIFTY BANK index was trading 0.55% lower at 55,930.95 levels, while the NIFTY FINANCIAL SERVICES index was trading at 26,647.45, down 0.48%.

Among individual names, SBI shares were trading half a per cent lower at ₹860.45 apiece on the NSE, while Bank of Baroda Ltd was down 0.6% at ₹260.25. HDFC Bank was also trading 0.5% lower at ₹977.40, while ICICI Bank was trading 0.57% lower at ₹1,368.10.

The proposed guidelines are expected to enhance credit risk management practices and promote better comparability of reported financials across institutions.

The draft 'Reserve Bank of India (Scheduled Commercial Banks & All India Financial Institutions – Asset Classification, Provisioning and Income Recognition) Directions, 2025' also aims to align regulatory norms with internationally accepted regulatory and accounting standards.

The introduction of staging criteria for asset classification under the ECL approach, while retaining the extant norms for non-performing asset (NPA) classification, is one key element of the proposed framework.

Alignment of the income recognition norms based on the Effective Interest Rate (EIR) method and broad principles on model risk management for implementing ECL models are other objectives behind changing the extant regulations.

The RBI said that while the proposed directions are estimated to result in an additional one-time provisioning, the overall impact on the minimum regulatory capital requirements of banks is expected to be minimal, with all banks continuing to meet the requirements comfortably.

The proposed five-year glide path will further facilitate the transition in a non-disruptive manner.

ECL approach: What is it?

Basically, it refers to a change in how financial institutions (like banks) account for credit losses on loans and other financial assets. In the incurred loss model, banks waited until there was evidence that a borrower was likely to default (miss payments) before setting aside money to cover the potential loss.

Losses were "incurred" — meaning, they had to happen or be very likely before banks recorded them. This approach delayed recognition of losses, especially during financial crises.

In the Expected Credit Loss (ECL) model, banks must now estimate and recognise expected losses at the time they give out a loan — before any default happens.

They calculate potential credit losses based on future expectations (not just past events).

This is more forward-looking and conservative.

ECL framework: A look at details

Announcing the fourth bi-monthly monetary policy of the fiscal year earlier this month, RBI Governor Sanjay Malhotra said the ECL framework of provisioning with prudential floors is proposed to be made applicable to all Scheduled Commercial Banks (excluding Small Finance Banks (SFBs), Payment Banks (PBs), Regional Rural Banks (RRBs) and All India Financial Institutions (AIFIs)) with effect from April 1, 2027.

In January 2023, the RBI released draft guidelines for adopting the expected credit loss approach for credit impairment.

Under the ECL norms, banks would be required to classify financial assets (primarily loans, including irrevocable loan commitments, and investments classified as held-to-maturity or available-for-sale) into one of the three categories -- Stage 1, Stage 2, and Stage 3 – depending upon the assessed credit losses on them at the time of initial recognition as well as on each subsequent reporting date and make necessary provisions.

The RBI has also issued draft norms on the implementation of the revised Basel framework on the Standardised Approach for Credit Risk for Scheduled Commercial Banks, excluding small finance banks, payments banks, and regional rural banks.

The 'Draft Reserve Bank of India (Scheduled Commercial Banks - Capital Charge for Credit Risk – Standardised Approach) Directions, 2025' seeks to implement one of the key elements of the global reforms implemented by the Basel Committee on Banking Supervision (BCBS), suitably tailored to the Indian context.

"The Directions amend the existing standardised approach framework for calculating the capital charge for credit risk with the objective of enhancing its robustness, granularity, and risk sensitivity," the RBI said.

The major revisions in the norms include nuanced and granular risk weight treatment for exposures to corporates, MSMEs, and real estate and the inclusion of 'transactors' under the regulatory retail category, where transactors are credit cards with timely repayments during the previous 12 months.

The RBI has invited comments on the draft guidelines from the public and stakeholders by November 30, 2025, as per a PTI report.