Shares of public sector banks were reeling under selling pressure on Tuesday after the Reserve Bank of India ruled out extending the transition timeline for the expected credit loss (ECL) provisioning framework. The new norms are slated to be implemented from April 1 next year.

In its updated directions on asset classification, provisioning, and income recognition for commercial banks, the Reserve Bank of India on Monday said lenders had sought more time to prepare, citing the need to build data infrastructure, refine risk models, and upgrade systems. However, the central bank maintained that a one-year preparation window is sufficient and declined to accept the feedback on the draft norms first issued on October 7, 2025.

Weighed down by the development, the Nifty PSU Bank Index, which tracks public sector banks, fell by as much as 1.9%. Meanwhile, the benchmark Nifty 50 slipped 0.3%, giving up early gains.

Among stocks, State Bank of India declined 1.43%, while Punjab National Bank and Bank of Baroda dropped nearly 2% each. Union Bank of India led the losses, falling by as much as 3.5% in intraday trade, followed by Canara Bank, which was down around 3%.

All 12 constituents of the Nifty PSU Bank index were trading in the red, with Bank of Maharashtra, Bank of India, and Indian Bank, among others, declining in the range of 1-2%.

What is RBI’s ECL regime?

The RBI's ECL provisioning framework, effective April 1, 2027, mandates that banks move from an "incurred loss" model to a forward-looking approach. Unlike the current system, which recognises losses only after a default occurs, the ECL framework requires banks to anticipate potential credit losses over the life of a loan. This will be based on a three-stage, probability-weighted staging framework, aimed at strengthening risk assessment and enhancing financial stability.

“The proposed directions seek to replace the incurred-loss-based provisioning framework with an ECL-based provisioning regime, subject to prudential floors. These are expected to further strengthen credit risk management practices, promote greater comparability across financial institutions, and align regulatory norms with globally accepted standards,” the RBI said.

The proposed framework introduces a three-stage classification system for assets under the Expected Credit Loss (ECL) approach, while continuing to follow the existing norms for recognising non-performing assets (NPAs). It also sets minimum provisioning levels, called prudential floors, for different types of loans across Stage 1, Stage 2, and Stage 3.

In addition, income recognition will be aligned with the Effective Interest Rate (EIR) method, ensuring a more consistent approach to accounting. The framework further lays down broad guidelines for model risk management, helping banks build and use ECL models more effectively.

While the proposed directions are expected to lead to a one-time increase in provisioning, their overall impact on banks’ regulatory capital requirements is likely to be limited, with most lenders remaining comfortably above the prescribed thresholds, as per the RBI. The central bank has also proposed a five-year glide path to ensure a smooth and non-disruptive transition to the new framework.