The Reserve Bank of India (RBI) has set up an external working group on expected credit loss (ECL) based framework for provisioning by banks.

Chaired by R. Narayanaswamy, former professor of IIM Bangalore, the working group will lay down the principles for banks while designing the credit risk models to be used for assessing and measuring expected credit losses.

It will also recommend factors that banks should consider for determination of credit risk and suggest the methodology to be used for undertaking external independent validation of the models. 

RBI will include recommendations of the working group while framing the draft guidelines, which will be put in the public domain for comments before issue of final guidelines, it said.

Earlier, on 16 January this year, the Reserve Bank had released a discussion paper on the ECL model and sought inputs from all the stakeholders. The introduction of ECL framework for provisioning by banks is aimed at making the banking system more resilient.

Under the ECL model, banks will have to recognise stress much before incurring losses. In the existing regime, banks make provisions after incurring losses.

“Several comments have been received from various stakeholders on the issues flagged in the Discussion Paper, which are being examined by the Reserve Bank. While the regulatory stance to be taken in respect of each of the issues shall be examined by the Reserve Bank, it has been decided to constitute a Working Group in order to get independent inputs on some of the technical aspects having a bearing on the significant transition involved," said the central bank in an official release.

Sanjay Kallapur, ISB, Hyderabad, Rajosik Banerjee, KPMG, S Srinivasa Rao, SBI, Rajendra Khandelwal, ICICI Bank, Susanta Baishya, HDFC Bank, Adish Yadav, Canara Bank, Sridharan N, Equitas Small Finance BanK and Pravin Kumar Taparia, Saraswat Co-operative Bank are members of the working group. 

The recommendations of the working group would be duly factored in while framing the draft guidelines, which shall be put in the public domain for comments before issue of final guidelines, RBI said.