Banks are still trying to figure out what the Reserve Bank of India’s (RBI) proposed expected credit loss (ECL) guidelines for provisioning will have on them. 

An exact estimate will be difficult to have at this stage as the final guidelines for ECL are awaited. But this will require banks to factor in additional provisions requirements and the impact, according to analysts, will be more on the state-run lenders.

Morgan Stanley roughly estimates the impact to be in the range of 1% to 2.5% of loans. The foreign brokerage has also suggested that the potential impact on the net worth of these banks could range from 5% to 20%.

"Banks have been doing pro forma calculations based on certain assumptions. Some banks have disclosed their potential impact at 4-5% of loans, which includes non-ECL-related capital requirements for Ind-AS as well (which is not in the pipeline as of now). On ECL provisioning deficit, it's tough to estimate the exact impact pending final guidelines", Morgan Stanley said in a note.

Morgan Stanley expects ECL to have greater impact on Punjab National Bank (PNB) and Canara Bank while favouring Bank of Baroda, State Bank of India (SBI) and Bank of India due to their stronger balance sheets. It has also downgraded PNB to an underweight rating from equal weight. 

The RBI had issued a discussion paper in January initiated the process of gathering feedback on the ECL-based loss provisioning model by issuing a discussion paper. This paper was aimed at collecting inputs from all stakeholders involved. It is anticipated that the final guidelines for the ECL model will be notified by the financial year 2023-2024, with the implementation scheduled to begin on April 1, 2025.

In January, the RBI had issued a discussion paper which proposes to bring banks’ provisioning requirements on par with those for non-banking financial companies (NBFCs). It proposed that the requirement for estimating impairment losses under the expected credit loss approach would apply to all loans and advances.

While the current norm is for banks to build provisions after a default occurs, the ECL framework proposes to capture the probability of default (PD) and the loss given default (LGD) at an earlier stage by looking at historical individual experiences.

According to the Morgan Stanley note, Bank of India has weak asset quality but better capital and coverage. Bank of Baroda stands out with good capital, coverage, and a superior asset quality track record. SBI, despite lower capital, showcases better coverage and asset quality, aided by a higher proportion of retail loans.