The Indian central bank's discussion paper suggesting banks make provisions on bad loans using an expected credit loss (ECL) method could raise capital requirements for lenders, analysts said.
proposing a shift away from the current method - where loan loss provisions are made after a default - to one where banks will need to assess the probability of default upfront and provision accordingly.
"The problem here is that over the last 5-10 years, the probability of default would have been very high for the banking sector and that's why eventual ECL provisions could be higher,” Macquarie said. The model to calculate the expected credit loss is to be decided by individual banks but is subject to independent evaluation and a floor on provisions set by the regulator, the discussion paper said.
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