ECL from April 2027: What Banks Must Fix in Their Loan Systems Now

In brief

• The RBI issued its final expected credit loss (ECL) Directions on 27 April 2026. Commercial banks in India move to ECL provisioning from 1 April 2027.¹²
• Each exposure falls into one of three stages. More than 30 days past due creates a presumption of a move to Stage 2. For most loan categories, that means a minimum provision of 5%, compared with 0.40% in Stage 1.²
• Banks can phase the capital effect over four financial years, ending in 2030-31. Loans already on the books must move to effective interest rate (EIR) accounting by 31 March 2030.²
• The first ECL-based reporting covers the financial position as on 30 June 2027.²
• The loan origination and loan management systems hold much of the data needed: origination records, daily days past due, undrawn limits, fees, collateral values and recoveries. These records are the starting point for preparation.

A bank can build an ECL model and still struggle to produce a reliable provision. If the original risk grade has been overwritten, fees are held outside the loan record or recoveries sit in a separate collection tool, the model has gaps to work around.

That is the operational challenge behind the RBI ECL framework. The Reserve Bank of India issued its final expected credit loss Directions on 27 April 2026, following the October 2025 draft.¹ Capital impact and model design have received much of the attention. But both depend on data captured every day in the loan origination system and loan management system.

Below, we look at what the Directions require and the seven loan-system checks worth making before the first reporting date. Paragraph references point to the relevant provisions so your team can read them in context.

What changes on 1 April 2027?

Under the incurred-loss model currently in force, provisions follow asset classification.³ For a term loan, the central test is whether interest or principal has remained overdue for more than 90 days. At that point, the account becomes a non-performing asset (NPA).

The Reserve Bank of India (Commercial Banks – Asset Classification, Provisioning and Income Recognition) Directions, 2026 retain that 90-day NPA test.² The change is that banks must also estimate expected losses from the day an exposure is first booked. Each exposure is assigned to Stage 1, Stage 2 or Stage 3.

Stage 2 deserves particular attention. Moving a loan out of Stage 1 changes the provision from a 12-month expected loss to a lifetime expected loss. Under paragraph 33, contractual payments that are more than 30 days past due create a rebuttable presumption of a significant increase in credit risk. For cash credit and overdraft facilities, the test concerns the balance remaining continuously above the sanctioned limit or drawing power, whichever is lower. The Directions specify a period of up to 60 days for this test.

Rebutting the presumption requires reasonable and supportable information showing that credit risk has not increased. It cannot be a routine or mechanical exercise (paragraph 34). At each reporting date, the bank compares the current risk position with the position at initial recognition. Without a preserved origination record, that comparison becomes difficult.

Which banks does the ECL framework apply to?

The Directions cover commercial banks: banking companies, corresponding new banks and the State Bank of India (paragraph 4). Small finance banks, payment banks and local area banks are expressly excluded. Regional rural banks and co-operative banks are not mentioned in the definition. The RBI has said that separate Directions will follow for All India Financial Institutions.¹

The instrument scope extends beyond disbursed loans. It includes debt securities not measured at fair value through profit or loss, trade and lease receivables, loan commitments—including undrawn commitments—and off-balance-sheet credit exposures (paragraph 17).

What are the provisioning floors and the capital transition?

A bank's modelled ECL is subject to prudential floors. The Stage 1 and Stage 2 minimums depend on the loan category; the same percentage does not apply across the book.

Stage 3 has a different set of floors, linked to how long the account has remained in that stage. For the main categories, the floor on the secured portion starts at 25% in the first year and reaches 100% after four years. The unsecured portion starts at 40% and reaches 100% after one year. Unsecured retail loans have a starting floor of 25%, rising to 100% after one year.²

Banks also have an option to phase the capital effect. They may add back a fraction of the transitional adjustment amount, net of applicable taxes, to Common Equity Tier 1 (CET1). The adjustment is the excess of ECL required on 1 April 2027 over provisions held under the existing norms on 31 March 2027 (paragraph 107).

The permitted fraction reduces each year: four-fifths in 2027-28, three-fifths in 2028-29, two-fifths in 2029-30 and one-fifth in 2030-31 (paragraph 108). CRISIL Ratings estimates that the one-time net impact on banks' CET1 ratios could be up to 120 basis points.³

Key dates

1. 27 April 2026The RBI issues the final Directions.
2. 1 April 2027The Directions take effect. Loans originated from this date use EIR at initial recognition.
3. 30 June 2027The financial position on this date forms the basis of the first ECL reporting (paragraph 147).
4. 31 December 2027Quarterly unaudited results continue under the existing regulations in parallel up to this date (paragraph 149).
5. 31 March 2028The first ECL reporting with previous-year comparatives is due (paragraph 148).
6. 31 March 2030All loans outstanding on 31 March 2027 must have moved to the EIR regime (paragraph 21).
7. 2030-31The final financial year of the CET1 add-back.

Why does ECL preparation start in the loan system?

Several requirements in the Directions concern the quality and history of the underlying data. Credit risk data must be "sufficiently granular to enable meaningful assessment of the borrowers' credit profile" (paragraph 61). Banks need processes to identify and manage data quality risks in model inputs (paragraph 62), as well as historical loss data "covering an adequately representative period" (paragraph 64).

Asset classification must also run through "technology enabled processes", with NPA classification included in the day-end process (paragraph 15). These requirements reach directly into the systems where loans are booked, serviced and collected.

A probability of default model can be recalibrated. An overwritten origination rating is harder to recover. So is a payment collected after default but never posted back to the loan account. Reconstructing those records later takes work and leaves questions about their reliability.

Seven things to fix in the loan system now

Use these seven checks to connect the requirements in the Directions with the records your loan system can actually produce.

1. 1

   Preserve what was known at origination

   Measure significant increase in credit risk against the position at initial recognition. The system must retain the origination date and the risk grade, score or probability of default assigned at sanction for every facility, without overwriting them during later reviews.

   System checkFor any live loan, can the system display the rating at sanction alongside the rating today?

2. 2

   Count days past due every day

   Accurate daily counting underpins both the 30-day presumption and the 90-day NPA test. NPA classification must run in the day-end process, and the classification date is the calendar date for which that process runs (paragraph 15). For cash credit and overdraft accounts, the system must also count consecutive days above the sanctioned limit or drawing power, with a date recorded for every change in drawing power.

   System checkDoes the system calculate days past due daily from the repayment schedule, without a month-end spreadsheet in between?

3. 3

   Keep a staging history with reasons

   Every Stage 1, Stage 2 and Stage 3 movement should record its date and trigger. If the 30-day presumption was rebutted, retain the supporting evidence and approver as well. A Stage 3 account that has not been restructured may move directly to Stage 1 only after all irregularities have ceased and there is no evidence of significant increase in credit risk (paragraph 77). The system therefore needs to show why the account entered Stage 3.

   System checkCan you reproduce the staging of the entire book as at any past reporting date?

4. 4

   Bring undrawn limits into the same dataset

   Undrawn commitments and off-balance-sheet credit exposures are within scope (paragraph 17). When sanctioned but undisbursed amounts are in the origination system, unutilised limits are in the loan management system and guarantees sit elsewhere, they must be joined under one customer ID at every reporting date.

   System checkIs the undrawn amount for each facility available on the reporting date under the same customer ID as the funded exposure?

5. 5

   Record fees and costs loan by loan for EIR

   For loans originated on or after 1 April 2027, compute ECL using the effective interest rate determined at initial recognition (paragraph 50). Loans outstanding on 31 March 2027 must come under EIR by 31 March 2030 (paragraph 21). Because EIR spreads the fees and costs forming part of a loan's yield over its life, record each item against the individual loan when it is booked.

   System checkAre processing fees and sourcing costs stored on the loan record, and does the loan system reconcile with the general ledger loan by loan?

6. 6

   Tag product, security and Stage 3 dates cleanly

   Floors vary by loan category. Within Stage 3, they also vary according to the secured and unsecured portion and the time spent in the stage. For Stage 3 exposures beyond ₹7.5 crore, value collateral at classification and at least once every two years thereafter, and value stock at least annually (paragraph 55).

   System checkDoes each loan map to exactly one floor category, with its security value, valuation date and date of entry into Stage 3 recorded?

7. 7

   Post recoveries back to the defaulted account

   Loss given default is based on what was actually recovered after default: the amount, timing, source and cost. The Directions ask for historical loss data over an adequately representative period (paragraph 64). If collections are handled in a separate tool, that history is usable only when it is written back to the loan account.

   System checkFor accounts that defaulted in earlier years, can you list every recovery with its date and source?

The seven checks also need to stand up to review. The Board is responsible for oversight of the ECL framework (paragraph 56). The Directions require a three-tier model risk management structure covering model owners, risk management and compliance, and internal audit (paragraph 74). Dated data snapshots and versioned parameters help the bank rerun a past reporting date and reproduce the result. Without them, explaining why a number changed can be difficult.

In what order should a bank tackle this?

With 1 April 2027 approaching, the work needs a clear order. Start with the records that new loans will need, then test whether the existing book can support the first reporting cycle.

1. Run the seven checks for each product. Provisioning floors vary by product. Recording the gaps product by product makes it easier to see what needs fixing.
2. Prioritise data capture for new loans. Loans booked from 1 April 2027 need EIR from initial recognition. Loans already on the books have until 31 March 2030 to move to the EIR regime.
3. Run ECL alongside current provisions for at least one quarter-end before April. A parallel run gives the team a chance to examine differences. Quarterly results under the existing regulations will continue alongside ECL reporting up to 31 December 2027 in any case.
4. Complete reconciliation before the first reporting date. ECL reporting starts with the position as on 30 June 2027. Disclosures follow Annex 4 of the Directions (paragraph 146). The provision recorded in the loan system should agree with the general ledger before that cycle begins.

What should NBFCs and co-lending partners do?

For NBFCs already reporting under Ind AS, expected credit loss is not new. The January 2016 Ind AS roadmap required NBFCs with a net worth of ₹500 crore or more to adopt Ind AS from 1 April 2018. Listed NBFCs and those with a net worth of ₹250 crore or more followed from 1 April 2019.⁴ These NBFCs make impairment allowances under Ind AS 109. Since 2020, the RBI has also expected their Boards to approve the methodology used to calculate expected credit losses.⁵

The new preparation concerns their bank partnerships. Under the RBI's Co-Lending Arrangements Directions, 2025, co-lenders already exchange information no later than the end of the next working day.⁶ With a 5% Stage 2 floor, we expect banks to pay closer attention to 30-day delinquency data in co-lent pools. An NBFC able to provide clean, daily, account-level records is better placed to support those reporting needs.

The seven checks are also useful for lenders outside the scope of these Directions. They test whether the loan system can preserve and reproduce the records a lender needs.

Where Rewafin fits

Rewafin brings loan origination, loan management, collections and accounting into one lending platform. For a team preparing for ECL, this brings the origination record, daily account position, recovery history and ledger entries into the same system. The seven checks above can then be worked through using a connected loan record rather than records held across separate tools.

Frequently asked questions

Sources

1. Reserve Bank of India, Press Release 2026-2027/150, "RBI issues Directions on Asset Classification, Provisioning, and Income Recognition for Commercial Banks", 27 April 2026. rbi.org.in
2. Reserve Bank of India (Commercial Banks – Asset Classification, Provisioning and Income Recognition) Directions, 2026, RBI/DOR/2026-27/398, 27 April 2026. Paragraph numbers in this article refer to this document. rbi.org.in
3. CRISIL Ratings, "For banks, ECL norms to have one-time net impact of up to 120 bps", press release, 30 April 2026. crisilratings.com
4. Government of India roadmap for implementation of Ind AS by banks, insurers and NBFCs, January 2016, as reported by Business Standard. business-standard.com
5. Reserve Bank of India, "Implementation of Indian Accounting Standards", RBI/2019-20/170, 13 March 2020. rbi.org.in
6. Reserve Bank of India (Co-Lending Arrangements) Directions, 2025, as summarised by AZB & Partners, 30 September 2025. azbpartners.com

This article provides a general summary for information only. It is not legal, accounting or regulatory advice. Refer to the Directions for the complete requirements.