Major overhaul of bank loan rules: RBI’s new ECL specification will change loans and protect your funds – you need to know
Sources said the Reserve Bank of India (RBI) will finalize its expected credit loss (ECL) framework within the next 2-3 months and will take effect on April 1, 2026.
The move marks a huge change in how banks deal with loan losses. The new anticipated credit loss system will no longer wait for loans to go bad, but will allow banks to check risks early and reserve funds in advance after global practices.
Key changes under ECL system
Currently, banks in India follow the incurred loss model (ICL), which according to which they only set aside funds to pay for potential loan losses only after the borrower has missed the payment within 90 days, when the loan is marked as a non-performance asset (NPA).
The upcoming expected credit loss (ECL) model will replace this approach with a forward-looking system. Banks will have to assess the risks of loans when taking into account things like borrowers’ financial situation, credit history and even broader market conditions. If the loan seems to be risky, they need to start freeing up funds immediately, rather than waiting for the problem to arise later.
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Implementation timetable
The Reserve Bank of India released a draft guide on the ECL model on January 16, 2023. Banks request additional time to prepare for the transition. Since then, they have begun to modify their internal accounting systems to align with the upcoming framework.
Impact on banks
Now, banks will identify and take possible defaults before the loan is truly under pressure.
The ECL model aligns Indian banks with international standards such as IFRS 9 used in many advanced economies.
Expect banks to be more cautious – they may tighten credit checks and screen borrowers more carefully before approving new loans.
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FAQs (FAQs)
1. What is a simple ecl? Can you explain it simply?
ECL means that banks will estimate future credit losses when providing loans and allocate funds accordingly, rather than waiting for the loan to go bad.
2. When will it be put into use?
April 1, 2026 should be the date of implementation under the Indian Banking Law.
3. Will my existing loan be affected?
No, this matter is related to the bank’s lying accounting. Your loan terms remain the same.
4. Why did the management bring such changes?
Strengthen Indian banks and place them on the map with global standards so that these banks can sustain themselves under financial shocks.
5. Will this make a loan difficult?
perhaps. Now, as risk assessments increase, banks may review loan applications more strictly.
