RBI Constitutes Working Committee For Provisioning By Banks
The Reserve Bank of India (RBI) announced the establishment of a Working Group to evaluate the proposed Expected Credit Loss (ECL) framework for provisioning by banks. The Discussion Paper, released on 16 January 2023, marks a significant departure from the current incurred loss-based provisioning system. The ECL approach, already in operation under International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB), envisions a forward-looking, principle-based model for credit risk provisioning.
Professor R. Narayanaswamy, former Professor at IIM Bangalore, will chair the Working Group, comprising experts from both academia and industry, along with representatives from select banks. This includes Professor Sanjay Kallapur from ISB Hyderabad, Shri Rajosik Banerjee from KPMG, Shri S Srinivasa Rao from SBI, Shri Rajendra Khandelwal from ICICI Bank, Shri Susanta Baishya from HDFC Bank, Shri Adish Yadav from Canara Bank, Shri Pravinkumar Taparia from Saraswat Co-operative Bank, and Shri Sridharan N from Equitas Small Finance Bank.
The Terms of Reference for the Working Group would be as follows:
Delineate the principles that will be required to be considered by banks while designing the credit risk models to be used for assessing and measuring expected credit losses.
Recommend factors that banks should consider for determination of credit risk based on the guidance provided in IFRS 9 and principles laid out by BCBS.
Suggest the methodology to be used for undertaking external independent validation of the models.
Recommend, based on comprehensive data analysis, prudential floors for provisioning.
Any other issue incidental to the above.
The recommendations of this Working Group will be carefully integrated into the drafting of the guidelines, which will subsequently be made available for public feedback before the final issuance. This marks a significant step towards modernizing and aligning India's banking provisions with international standards.
