RBI's New ECL-Based Asset Classification & Provisioning Directions 2026

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Short title and commencement B. Applicability C. Definitions Chapter II: Classification as Non-Performing Asset A. Classification as Non-Performing Asset B. Other Prudential Norms applicable to a bank Chapter III: Expected Credit Loss (ECL) – based Provisioning A. The Methodological Framework for calculating ECL B. Fair Valuation on Transition C. Initial Recognition and subsequent measurement D. Determination of Significant Increase in Credit Risk (SICR) E. Measurement of ECL – Treatment of different Financial Instruments F. Determination of the period over which Lifetime ECL is measured G. Probability-weighted outcome H. Effective Interest Rate I. Collateral J. Building Blocks for Computing ECL K. Other Prudential Aspects of ECL framework L. Level of Application M. Upgradation of accounts N. Prudential Floors for ECL O. Regulatory Probability of Default (PD) P. Regulatory Loss Given Default (LGD) Q. Exposure at Default (EAD) R. Additional provisions in Specific cases S. Treatment of accounts classified as Non-Performing as on March 31, 2027 T. Consolidated Financials U. Transition Arrangements Chapter IV: Income Recognition Chapter V – Principles for Model Risk Management under ECL A. Comprehensive Model Inventory B. Categorization of Models Through Risk-Based Tiering C. Model Documentation D. Structured Lifecycle Approach E. Integration of Macroeconomic Variables F. Incorporation of Additional Risk Considerations G. Model Validation H. Model Calibration I. Leveraging Credit Judgement J. Continuous Monitoring of Model Performance K. Third Party Models Chapter VI: Disclosures, Regulatory Reporting and Repeal A. Disclosures B. Credit risk management practices C. Quantitative and qualitative information about amounts arising from ECL D. Repeal and Other Provisions Annex 1 Annex 2 Annex 3 Annex 4 Annex 5 Introduction Banks in India are presently governed by the prudential norms on income recognition, asset classification and provisioning prescribed by the Reserve Bank of India (RBI). With a view to further strengthening the resilience, transparency and consistency of the banking sector, and having considered the stakeholder feedback received in this regard, the Reserve Bank, in exercise of powers conferred by Sections 21, and 35A of the Banking Regulation Act, 1949, being satisfied that it is necessary and expedient in the public interest so to do, hereby issues these Directions hereinafter specified. These Directions, inter alia, provide for: (1) introduction of a staging framework for asset classification under the Expected Credit Loss (ECL) approach, while retaining the extant norms for classification of non-performing assets (NPAs); (2) adoption of a forward-looking provisioning approach under the ECL framework; and (3) adoption of Effective Interest Rate (EIR) method. These Directions are intended to further strengthen credit risk management practices, improve comparability across regulated entities, and align the regulatory framework more closely with internationally accepted financial reporting principles. Chapter I: Preliminary A. Short title and commencement 1. These Directions shall be called the Reserve Bank of India (Commercial Banks - Asset Classification, Provisioning and Income Recognition) Directions, 2026. 2. These Directions shall come into force with effect from April 1, 2027. 3. Banks shall continue to be governed by the Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 until the date of commencement of these Directions. On such commencement, the said Directions shall stand repealed. B. Applicability 4. These Directions shall be applicable to Commercial Banks (hereinafter collectively referred to as 'banks' and individually as a 'bank'), For the purpose of these Directions, ‘Commercial Banks’ means banking companies (other than Small Finance Banks, Payment Banks and Local Area Banks), corresponding new banks, and the State Bank of India, as defined respectively under clauses (c), (da), and (nc) of Section 5 of the Banking Regulation Act, 1949. 5. A bank shall also follow the prudential guidelines for restructured accounts as prescribed in the Reserve Bank of India (Commercial Banks – Resolution of Stressed Assets) Directions, 2025 , in addition to these Directions, as amended from time to time. C. Definitions 6. For the purpose of these Directions, unless the context states otherwise, the terms herein shall bear the meaning assigned to them below: (1) “Amortised cost” of a financial instrument means the carrying amount at which the financial instrument is measured at a reporting date, subsequent to initial recognition, after taking into account principal repayments, the cumulative amortisation, using the EIR method, of any difference between the amount at initial recognition and the maturity amount, adjusted for any loss allowance. (2) “Cash Credit” means a revolving working capital facility, under which a borrower is permitted to draw an advance, up to the sanctioned credit limit subject to permitted drawing power (DP), against the security of current assets, including goods, book debts, standing crops, etc. The DP in such facility shall be periodically determined with reference to the value of the eligible current assets. The outstanding amount shall be repayable on demand. (3) “Credit-impaired financial asset” refers to a financial asset characterized by objective evidence of impairment, resulting from events that materially reduce the likelihood of recovering the asset’s contractual cash flows in full and/or on time. Such events may include, but are not limited to: (i) Non-Performing Status: It shall mean a financial asset, which has ceased to generate income. The detailed criteria for classification of a financial asset as non-performing are provided in Chapter II of these Directions. (ii) Borrower’s Financial Distress: The issuer or borrower experiences financial difficulties, which impairs their ability to service debt obligations. (iii) Lender Concessions: The lender grants concessions - such as reduction in interest rates, rescheduling of repayment, or other reliefs, due to the borrower’s financial difficulty, which would not have been offered under normal circumstances. (iv) High Probability of Insolvency: There is a significant likelihood that the borrower will enter bankruptcy, undergo financial reorganization, or face similar proceedings that could jeopardize repayment. (v) Acquisition at Discount: The asset is purchased or originated at a discount, reflecting inherent credit losses due to the borrower’s deteriorated credit quality. (4) “Credit-adjusted effective interest rate” means the rate that exactly discounts the estimated future cash flows over the expected life of a purchased or originated credit-impaired financial asset (POCI) to its amortised cost at initial recognition. (5) “Default” means the status of a financial asset that has been classified as a Non-Performing Asset in accordance with Chapter II of these Directions. This definition shall apply solely for the purpose of these Directions and shall be without prejudice to the meaning of term ‘default’ as defined under any other regulatory instructions. (6) “Effective interest rate” is the rate that exactly discounts estimated future cash flows through the expected life of the instrument to the gross carrying amount of a financial asset. (7) “Expected credit loss” means the weighted average of credit losses under different scenarios with the respective probability of the various scenarios as the weights. (8) “12-month ECL” means the portion of lifetime ECL that represent the expected credit losses that result from default events on a financial instrument that are possible within 12 months from the reporting date. (9) “Fair Value through Profit and Loss (FVTPL)” means those financial assets classified as such in terms of the ‘ Reserve Bank of India (Commercial Banks – Classification, Valuation and Operation of Investment Portfolio) Directions, 2025 , as amended from time to time. (10) “Financial asset” means any asset that is: (i) cash; (ii) an equity instrument of another entity; or (iii) a contractual right to receive cash, or another financial asset from another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity. (11) “Financial instrument” means any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. (12) “Gross carrying amount of a financial asset” is the amortised cost of a financial asset, before adjusting for any loss allowance. (13) “Lifetime ECL” is the ECL that result from all possible default events over the expected life of a financial instrument. (14) “Long duration” crops mean crops which are not short duration crops. The crop season for long duration crops i.e., anticipated period from sowing to marketing is more than twelve months and up to eighteen months. (15) “Loss allowance” means an accounting provision for ECL on financial instruments, which come under the purview of these Directions. (16) “Micro Enterprises, Small Enterprises, and Medium Enterprises” shall be in terms of the Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector dated July 24, 2017 , as amended from time to time. (17) “Out of order status” – a cash credit / overdraft (CC / OD) loan shall be treated as ‘out of order’ if any of the following conditions get satisfied: (i) the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power for ninety days; (ii) there are no credits continuously for ninety days; (iii) credits are not enough to cover the interest debited during the previous ninety days period. Explanation 1: ‘Previous ninety days period’ referred to in Sl. No. (iii) above shall be inclusive of the day for which the day-end process is being run. Explanation 2: The definition of “out of order” shall be applicable to all funded loan products which are not in the nature of a term loan, except credit cards. (18) “Overdraft” means a credit facility, under which a borrower is allowed to drawdown an agreed sum (credit limit) in excess of credit balance in their account. The overdraft facility may be secured (against fixed/ term deposits and other securities, like small saving instruments, surrender value of insurance policies, etc.) or clean (i.e., without any security). The overdraft facility might be granted on the borrower’s current account, savings deposits account or temporary overdraft on credit accounts. (19) “overdue status” means any amount due to a bank including principal or interest shall be treated as ‘overdue’ if it is not paid on the due date fixed by the bank. (20) “Purchased or originated credit-impaired financial asset” (POCI) means financial assets that are credit-impaired on initial recognition. (21) “Review” of a financial asset shall refer to the process undertaken by the bank to evaluate the performance of the financial asset vis-à-vis the sanction terms to identify any SICR. (22) “Renewal” of a financial asset which is a revolving credit facility (cash credit, overdraft), shall refer to the process by which a bank undertakes a fresh review of the existing revolving credit facility whose sanctioned term has lapsed or is due to lapse, for continuation of the facility on the same or revised terms and conditions. (23) “Reporting date” is the end of period on which a bank is required to prepare its books of accounts under statute or under a regulation. (24) “Secured portion of a financial instrument” is the extent to which the financial instrument is covered by the realisable value of the tangible security to which the bank has a valid recourse, and the realisable value is estimated on a realistic basis. (25) “short duration crops” shall mean crops with anticipated duration from sowing to marketing up to twelve months. (26) “Significant Increase in Credit Risk” (SICR) is a significant or material change in the estimated “Default” Risk over the remaining expected life of the financial instrument. (27) “Standard assets” for the purpose of these directions shall mean exposures which are not classified as non-performing asset. (28) “Term Loan” refers to a fund-based credit facility of a fixed principal amount made available by a bank to a borrower with all of the following features: (i) The sanctioned limit is disbursed in one or more instalments and is repayable in accordance with a predetermined amortization schedule, either in instalments or as a bullet on the stated due date. (ii) Once disbursed, the sanctioned limit cannot be restored/ replenished upon repayment of a whole or part of the principal amount. (29) “Transaction cost” means the incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset. (30) The terms, “Date of Commencement of Commercial Operations (DCCO)”, and ”financial closure” shall have the same meaning given in the Reserve Bank of India (Commercial Banks – Resolution of Stressed Assets) Directions, 2025 , as amended from time to time. (31) “Commercial Real Estate – Acquisition, Development and Construction Exposures” - CRE(ADC)– shall have the same meaning given in Reserve Bank of India (Commercial Banks - Capital Charge for Credit Risk – Standardised Approach) Directions, 2026 . (32) “Commercial Real Estate – Residential Housing (ADC)” - CRE-RH (ADC)- shall have the same meaning given in Reserve Bank of India (Commercial Banks - Capital Charge for Credit Risk – Standardised Approach) Directions, 2026 . 7. All other expressions, unless defined in the respective parts, shall have the same meaning as have been assigned to them under the Banking Regulation Act, 1949 or the Reserve Bank of India Act, 1934 or any statutory modification or re-enactment thereto or any other relevant regulation or as used in commercial parlance, as the case may be. Chapter II: Classification as Non-Performing Asset A. Classification as Non-Performing Asset 8. A bank shall classify a financial asset as NPA if any of the following conditions are satisfied: (1) If interest and/ or principal remains overdue for a period of more than ninety days in respect of a term loan, bills purchased and discounted; (2) If it is classified as ‘out of order’ in respect of an Overdraft/ Cash Credit (OD/ CC); (3) If drawings are permitted for a continuous period of 90 days, in case of OD/ CC account where drawing power is sanctioned on the basis of stock statements/ receivable statements older than three months; (4) If it remains overdue for two crop seasons (rabi – rabi – rabi or kharif – kharif – kharif as the case may be) in the case of short duration crops and one crop season in the case of long duration crops; (5) If the amount of liquidity facility remains outstanding for more than ninety days, in respect of a securitisation transaction; (6) If Partial Credit Enhancement facility remains outstanding from the date of drawal for 90 days or more; (7) A credit card account where the minimum amount due, as mentioned in the statement, is not paid fully within ninety days from the payment due date mentioned in the statement 1 ; (8) If interest / instalment (including maturity proceeds) from debt instruments such as bonds or debentures is due and remains unpaid for more than 90 days. With regard to preference shares with fixed dividend payment, the Non-Performing Investment (NPI) classification shall be as per Reserve Bank of India (Commercial Banks – Classification, Valuation, and Operation of Investment Portfolio) Directions, 2025 . (9) In cases where a bank has more than one exposure to a borrower, and any one of the exposures is classified as NPA in terms of extant prudential norms, then the bank shall consider all exposures to that borrower as NPA. In other words, NPA classification shall be applied at the level of the borrower. (10) The financial assets classified as NPA may be upgraded as ‘standard’ asset only if the entire arrears of interest and principal are repaid by the borrower. In case of borrowers having more than one credit facility from a bank, the borrower shall be upgraded from NPA to standard asset category only upon repayment of entire arrears of interest and principal pertaining to all the credit facilities. For the purpose of this sub-paragraph, the borrower and the co-borrower shall be treated as jointly and severally liable for repayment of the credit facility. 9. Special cases of asset classification (1) The bills discounted under Letter of Credit (LC) favouring a borrower may not be classified as NPA, when any other credit facility granted to the borrower is classified as NPA. Notwithstanding the above, in case documents under LC are not accepted on presentation or the payment under the LC is not made on the due date by the LC issuing bank for any reason and the borrower does not immediately make good the amount disbursed as a result of discounting of concerned bills, the outstanding bills discounted will immediately be classified as NPA with effect from the date when the other facilities had been classified as NPA. (2) If any credit facility availed by an issuer is NPA in the books of the bank, investment in any of the securities, issued by the same issuer shall also be treated as NPI and vice versa. Provided that in cases where only the preference shares are classified as NPI, investment in any of the other performing securities issued by the same issuer or any performing credit facilities granted to that borrower/Issuer need not be treated as NPI/NPA. (3) Co-Lending Arrangements (CLA): Regulated Entities (REs) shall apply a borrower-level asset classification for their respective exposures to a borrower under CLA, implying that if either of the RE involved in the arrangement classifies its exposure to a borrower under CLA as Special Mention Account(SMA)/ NPA on account of overdue in the CLA exposure, the same classification shall be applicable to the exposure of the other RE to the borrower under CLA. REs shall put in place a robust mechanism for sharing relevant information in this regard on a near-real time basis, and in any case latest by end of the next working day. (4) Advances under consortium arrangements (i) Asset classification of loan accounts under consortium shall be based on the record of recovery of the individual member bank and other aspects having a bearing on the recoverability of the loan. (ii) Where the remittances by the borrower under consortium lending arrangement is pooled with one RE and/ or where the RE receiving remittances is not parting with the share of other members, the account shall be treated as not serviced in the books of the other members and therefore, be treated as NPA. (iii) The bank participating in the consortium shall, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books. (5) Advances against Term Deposits: Financial assets secured by term deposits placed with the same bank, need not be treated as NPAs, provided margin is available. However, this exemption from NPA classification is not available in cases where NPA classification is on account of application of paragraph 8.(9) above. Explanation: Margin for the above purpose shall refer to value of term deposits as a percentage of the loan outstanding (inclusive of accrued interest), which shall not fall below 100% at any point of time. (6) Loans with moratorium for payment of interest (i) In the case of financial assets where moratorium is available for payment of interest, payment of interest becomes ‘due’ only after the moratorium or gestation period is over. Such amounts of interest do not become overdue and hence do not become NPA, with reference to the date of debit of interest. They become overdue after due date for payment of interest, if uncollected. (ii) In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first quarter onwards. Such loans/ advances shall be classified as NPA only when there is a non-repayment of instalment of principal or payment of interest on the respective due dates. (7) Agricultural advances (i) Depending upon the duration of crops raised by an agriculturist, the crop season-based asset classification norms shall also be made applicable to agricultural term loans availed by them. (ii) The crop season-based asset classification norms shall be made applicable only to the following credit facilities extended for agricultural activities: (a) Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual farmers, provided a bank maintains disaggregated data of such loans], directly engaged in Agriculture only. This shall include: i. crop loans to farmers, which shall include traditional / non-traditional plantations, and horticulture; ii. medium and long-term loans to farmers for agriculture (e.g. purchase of agricultural implements and machinery and other developmental activities undertaken in the farm); iii. loans to farmers for pre and post-harvest activities, viz., spraying, harvesting, grading and transporting of their own farm produce; iv. loans to farmers up to ₹60 lakh against pledge/ hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding twelve months; v. loans to distressed farmers indebted to non-institutional lenders; vi. loans to farmers under the Kisan Credit Card Scheme; and, vii. loans to small and marginal farmers (SMFs) for purchase of land for agricultural purposes. (b) Loans to corporate farmers, farmers' producer organizations/ companies (FPOs)/ (FPCs) of individual farmers, partnership firms and co-operatives of farmers directly engaged in agriculture only up to an aggregate limit of ₹4 crore per borrower. This will include: i. crop loans to farmers which shall include traditional/ non-traditional plantations and horticulture; ii. medium and long-term loans to farmers for agriculture (e.g. purchase of agricultural implements, technological solutions, machinery and developmental activities undertaken in the farm); iii. loans to farmers for pre and post-harvest activities, viz., spraying, harvesting, sorting, and transporting of their own farm produce; iv. loans up to ₹2.5 crore against pledge/ hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding twelve months. (c) Loans to Primary Agricultural Credit Societies (PACS), Farmers' Service Societies (FSS) and Large-sized Adivasi Multi- Purpose Societies (LAMPS) for on-lending to agriculture. (iii) In respect of agricultural loans, other than those specified in Sl. No. (ii) above, identification of NPAs shall be done on the same basis as non-agricultural advances, which at present is the ninety days delinquency norm. (iv) Where natural calamities impair the repaying capacity of agricultural borrowers for the purposes specified in Sl. No. (ii), a bank may decide on their own as a relief measure conversion of the short-term production loan into a term loan or re-schedulement of the repayment period; and the sanctioning of fresh short-term loan, subject to Master Direction – Reserve Bank of India (Relief Measures by Banks in Areas affected by Natural Calamities) Directions 2018 – Scheduled Commercial Banks dated October 17, 2018, as updated from time to time. In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA. The asset classification of these loans would thereafter be governed by the revised terms and conditions and would be treated as NPA if interest and/ or instalment of principal remains overdue for two crop seasons for short duration crops and for one crop season for long duration crops. (v) While fixing the repayment schedule in case of rural housing advances granted to agriculturists under Indira Awas Yojana/ Pradhan Mantri Gram Awas Yojana and Golden Jubilee Rural Housing Finance Scheme, a bank shall ensure that the interest/ instalment payable on such advances are linked to crop cycles. (8) Government advances/ Government guaranteed advances (i) A bank shall not classify its investment in Central Government Securities and SLR eligible State Government Securities as Non-performing Investment (NPI). (ii) The financial assets backed by guarantee of the Central Government, though overdue, shall be treated as NPA only when the Government repudiates its guarantee when invoked. (iii) The exemption in Sl. No. (i) and (ii) above is not for the purpose of recognition of income. (iv) In case of restructuring of an exposure guaranteed by Central Government, the account shall be retained as standard, subject to Government reaffirming the guarantee and restructuring terms and conditions. (9) Export Project Finance (i) In respect of export project finance, there could be instances where the actual importer has paid the dues to the commercial bank abroad but the commercial bank in turn is unable to remit the amount due to political developments such as war, strife, UN embargo, etc. In such cases, where the lending bank is able to establish through documentary evidence that the importer has cleared the dues in full by depositing the amount in the commercial bank abroad before it turned into NPA in the books of the bank, but the importer's country is not allowing the funds to be remitted due to political or other reasons, the asset classification may be made after a period of one year from the date the amount was deposited by the importer in the commercial bank abroad. 10. A bank shall further classify non-performing assets into the following categories based on the period for which the asset has remained non-performing and the realizability of the dues. (i) Sub-standard asset: An asset, which has remained NPA for a period less than or equal to twelve months. A Sub-standard asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and is characterised by the distinct possibility that the bank will sustain some loss, if deficiencies are not corrected. (ii) Doubtful asset: An asset, which has remained in the substandard category for a period of twelve months. A doubtful asset has all the weaknesses inherent in assets that were classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full – on the basis of currently known facts, conditions and values – highly questionable and improbable. (iii) Loss asset: An asset, where loss has been identified by a bank or internal or external auditors or the inspection conducted by the Reserve Bank of India, but the amount has not been written off wholly by the bank. A loss asset is considered uncollectible and of such little value that its continuance as a financial asset is not warranted although there may be some salvage or recovery value. B. Other Prudential Norms applicable to a bank 11. The asset classification norms under these Directions shall be without prejudice to the requirements as laid down under Reserve Bank of India (Commercial Banks – Transfer and Distribution of Credit Risk) Directions , as amended from time to time. 12. A bank shall ensure that while granting credit facilities, realistic repayment schedules are fixed on the basis of borrower’s cash flows. This would go a long way in facilitating prompt repayment and improving the record of recovery. 13. In order to enhance transparency, lenders shall ensure that the loan contract provides for, inter alia, exact due dates for repayment of loan, breakup between principal and interest, schedule of other charges, illustration of SMA/ NPA classification and its impact on credit profile of the borrower, schema for appropriation of repayments 2 etc. The borrower shall be apprised of the same at the time of loan sanction and also at the time of any subsequent changes to the sanction terms/ loan agreement till full repayment of the loan. 14. A bank shall flag a borrower account as overdue, if so, as part of their day-end processes for the due date, irrespective of the time of running such processes. 15. Similarly, bank shall establish appropriate internal systems (including technology enabled processes) for proper, timely identification and classification of assets, on the basis of objective criteria of record of recovery. Classification of borrower accounts as NPA shall be done as part of day-end process for the relevant date and the NPA classification date shall be the calendar date for which the day-end process is run. Thus, the date of NPA shall reflect the asset classification status of an account at the day-end of that calendar date. Illustration: If due date of a loan account is March 31, 2021, and full dues are not received before the lending institution runs the day-end process for this date, the date of overdue shall be March 31, 2021. If the account continues to remain overdue further, it shall get classified as NPA upon running day-end process on June 29, 2021. Annex 3 of these Directions contains requirements relating to automation of Asset Classification with respect to NPAs/NPIs. 16. A bank shall compute their Gross Advances, Net Advances, Gross NPAs and Net NPAs as per the format specified under Annex 4 of these Directions. Chapter III: Expected Credit Loss (ECL) – based Provisioning A. The Methodological Framework for calculating ECL 17. The following financial instruments shall be under the scope of this Chapter: (1) Loans; (2) Debt securities other than those measured at Fair Value Through Profit or Loss (FVTPL) 3 ; (3) Trade receivables; (4) Lease receivables; (5) Loan commitments, including undrawn commitments; (6) Off-balance-sheet credit exposures; and, (7) Any other financial assets having contractual right to receive cash, unless specifically excluded under these Directions. Explanation: Any investment in subsidiaries, associates, and joint ventures shall be outside the purview of ECL-based provisioning. 18. For the purpose of measuring expected credit losses, a bank shall assess, at each reporting date, whether the credit risk on a financial instrument has increased significantly since initial recognition. Where such increase has not occurred, the bank shall recognise a loss allowance based on 12-month expected credit losses. Where such increase is determined to have occurred, the bank shall recognise a loss allowance, estimated based on lifetime expected credit losses. B. Fair Valuation on Transition 19. On the date of transition to the ECL framework, i.e., April 1, 2027, banks shall fair value their entire loan portfolio, including all outstanding advances. Any difference arising between the fair value of financial assets and their carrying amount immediately preceding the date of transition shall be adjusted against the opening balance of retained earnings and shall not be routed through P&L account. Where facts and circumstances indicate that the transaction has been undertaken on terms such that the fair value of the financial asset is not materially different from its carrying cost, the same shall be presumed to be the best evidence of fair value. C. Initial Recognition and subsequent measurement 20. For loans originated on or after April 1, 2027, a bank shall measure a financial asset, including a loan, at fair value plus or minus transaction costs that are directly attributable to the acquisition or origination of the financial asset. After initial recognition, a bank shall measure financial assets at amortised cost using the effective interest rate (EIR) method. 21. All loans outstanding as on March 31, 2027 shall be brought under the EIR regime no later than March 31, 2030. Banks shall ensure that the necessary adjustments arising out of transition to the EIR framework are duly recognized in their financial statements. 22. Initial recognition and subsequent measurement of investments, including debt securities, covered under these Directions shall be governed by the provisions of the Reserve Bank of India (Commercial Banks – Classification, Valuation, and Operation of Investment Portfolio) Directions, 2025 , as amended from time to time. 23. In the case of loan commitments, including undrawn commitments; and off-balance sheet exposures, the date on which the bank becomes a party to the irrevocable commitment or obligation shall be deemed to be the date of initial recognition for the purposes of application of ECL Framework. 24. A financial asset that is credit-impaired on initial recognition and qualifies as a POCI asset shall be identified separately and accounted for in accordance with the treatment applicable to POCI assets under these Directions. In such cases, the expected credit losses at the date of initial recognition, including at the date of transition, as applicable, shall be reflected in the estimated future cash flows used for computing the credit-adjusted effective interest rate, and no separate impairment allowance shall be recognised at such date in the manner applicable to other financial assets. Thereafter, only the cumulative changes in lifetime expected credit losses, relative to the estimate as at the date of initial recognition or transition, as applicable, shall be recognised as impairment gain or loss. D. Determination of Significant Increase in Credit Risk (SICR) 25. A bank shall recognise loss allowance under the ECL framework using a “three-stage” approach, based on changes in credit risk since initial recognition, and on whether the asset is credit-impaired at the reporting date: (1) Stage 1: A financial instrument shall be classified under Stage 1, where it has not experienced a SICR since initial recognition or where it is determined to have low credit risk in terms of Paragraph 37 of these Directions. In respect of such financial instruments, 12-month ECL shall be recognised, unless specifically exempted under these Directions. (2) Stage 2: A financial instrument shall be classified under Stage 2, where it has experienced a SICR since initial recognition but is not considered to be ‘credit impaired’. For such financial instruments, lifetime ECL shall be recognised. (3) Stage 3: A financial instrument shall be classified under Stage 3, where it is considered to be ‘credit impaired’ as at the reporting date. For such financial instruments, lifetime ECL shall be recognised. 26. At each reporting date, a bank shall assess whether the credit risk on the financial instrument has increased significantly since initial recognition. For this purpose, the bank shall compare the risk of default occurring on the financial instrument over its expected life as at the reporting date, with the risk of a default occurring on the financial instrument over its expected life as at the date of initial recognition, and shall consider reasonable and supportable information, that is available without undue cost or effort, that is indicative of significant increases in credit risk since initial recognition. 27. Where, for a particular class of financial instruments or portfolio segment, if risk of default is not concentrated at a specific point of time beyond 12 months, a bank may use such changes in 12 month risk of default for the purpose of assessing significant increase in credit risk, unless the facts and circumstances indicate that a lifetime assessment is necessary. However, such approximation shall not be used where the contractual payment profile, residual maturity, or the nature of relevant macroeconomic or other credit-related factors suggest that the risk of default is concentrated at a point beyond 12 months. 28. When more forward-looking information is unavailable, overdue status (either on an individual or a collective basis) may be used by a bank as a backstop to determine whether there has been a significant increase in credit risk since initial recognition. 29. The criteria adopted for determining SICR in all cases must be duly documented. Annex 1 of these Directions contains an illustrative list of information that may be relevant in assessing changes in credit risk. 30. The parameters that may be used by banks to determine SICR shall be used consistently. An indicative list of the manner in which such consistency may be operationalised is as given under: (1) If the bank uses “downgrade of a borrower by a recognised credit rating agency/ bank’s internal credit rating system” as a parameter for determining SICR, the internal policy of the bank shall clearly define the number of notches a particular rating shall be downgraded to be considered as having SICR. This shall be used consistently by the bank. (2) If the bank uses “increase in pricing of a loan” as a parameter for determining SICR, the quantum of increase in pricing that will be considered as SICR shall be documented as part of the internal policy. (3) If the bank uses “deterioration of the macroeconomic outlook” relevant to a particular instrument as a parameter for determining SICR, the macroeconomic parameters and the quantum of deterioration shall be documented as part of the internal policy. 31. A bank may, at its discretion, adopt an approach to recognise SICR for specific segments on a collective basis, subject to the underlying individual instruments satisfying certain shared credit risk characteristics. Examples of shared credit risk characteristics may include, but are not limited to: (1) instrument type; (2) credit risk ratings; (3) collateral type; (4) remaining term to maturity; (5) industry; (6) geographical location of the borrower; and, (7) the value of collateral relative to the financial asset if it has an impact on the probability of a default occurring. 32. Further, where collective assessment is used, it is not necessary for the entire segment to migrate to lifetime ECL if only a subset of the segment is identified as having experienced SICR. 33. Regardless of the manner in which a bank assesses SICR, there shall be a rebuttable presumption that the credit risk on a financial instrument has increased significantly since initial recognition when contractual payments are more than “30 days past due”. In the case of revolving facilities, the rebuttable presumption shall be that the outstanding balance remains continuously in excess of the sanctioned limit or drawing power, which ever is lower, for a period of up to 60 days. In such cases, the bank shall recognise lifetime ECL in respect of such financial assets. 34. A bank may rebut this presumption referred to in paragraph 33 only where it has reasonable and supportable information, available without undue cost or effort, demonstrating that the credit risk on the financial instrument has not increased significantly since initial recognition, notwithstanding that contractual payments are more than 30 days past due. Such rebuttal shall not be adopted in a routine or mechanical manner. 35. The policy, criteria and methodology for rebutting the presumption referred to in paragraph 34, including the nature of exposures, product classes or portfolio segments in respect of which such rebuttal may be considered, shall be clearly documented and approved by the Board or an appropriate Board-approved committee. The same shall be applied consistently to similarly placed exposures. 36. A bank shall maintain adequate documentation supporting each instance, or class of instances, where the presumption referred to in paragraph 33 has been rebutted, including the rationale, supporting evidence, validation and periodic review thereof. Where the basis for such rebuttal is found to be inadequate, the bank shall cease to apply such rebuttal and shall recognise significant increase in credit risk in accordance with paragraph 33. 37. A bank may not be required to test the following instruments for SICR: (1) SLR eligible investments; (2) Direct claims on central government; (3) Exposures fully guaranteed by the central government and (4) Exposures to Foreign Sovereigns, Foreign Central Banks, Multilateral Development Banks, Bank for International Settlements and Internal Monetary Fund, which attract a risk weight of zero percent, as specified under Reserve Bank of India (Commercial Banks - Capital Charge for Credit Risk – Standardised Approach) Directions, 2026 . 38. A bank is not required to maintain Stage 1 ECL for the exposures mentioned in paragraph 37 above. E. Measurement of ECL – Treatment of different Financial Instruments 39. Expected credit losses are a probability-weighted estimate of credit losses, measured over the relevant time horizon of the financial instrument in accordance with these Directions. 40. “Credit loss” for different types of financial instruments can be calculated as below: (1) For loans and similar financial assets, a credit loss is the difference between the present values of: (i) the contractual cash flows that are due to the bank under the contract; and, (ii) the cash flows that the bank expects to receive. (2) For undrawn loan commitments, a credit loss is the difference between the present values of: (i) the contractual cash flows that are due to the bank if the borrower draws down the loan; and (ii) the cash flows that the bank expects to receive if the loan is drawn down. (3) For a guarantee, cashflow shortfalls are the expected payments to reimburse the beneficiary of the guarantee for a credit loss that the issuing bank incurs, less any amount that the bank expects to receive from the beneficiary, the debtor or any other party. 41. For lease receivables and trade receivables, loss allowances shall always be measured at an amount equal to lifetime ECL irrespective of the stage of the instrument. A bank may use “Simplified Approach” for the same. The details of the Simplified approach are contained in Annex 2 of these Directions. 42. For calculation of ECL for instruments other than those mentioned in paragraph 41 above, a bank shall use a general approach consisting of three key functions i.e., Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD) conforming to the instructions and principles outlined in these Directions. Chapter-V of these Directions contains certain broad principles to be followed by a bank for ensuring prudence and robustness while using models in the process of ECL computation. 43. A bank’s estimate of ECL on loan commitments shall be consistent with its expectations of drawdowns on that loan commitment, i.e. it shall consider the expected portion of the loan commitment that will be drawn down within 12 months of the reporting date when estimating 12-month ECL, and the expected portion of the loan commitment that will be drawn down over the expected life of the loan commitment when estimating lifetime ECL. 44. It shall be noted that since ECL considers the amount and timing of payments, a credit loss arises even if the bank expects to be paid in full but at a later point in time than the contractual date. 45. Under the Expected Credit Loss (ECL) framework using the PD–LGD approach, banks shall compute Stage 1 ECL using a 12-month Probability of Default (PD) and Stage 2 ECL using a lifetime PD. Upon migration of an exposure from Stage 1 to Stage 2, or otherwise becomes subject to lifetime ECL, the bank shall estimate and apply a lifetime PD that appropriately reflects the revised credit risk characteristics of the exposure at the time of such migration. The lifetime PD shall not be derived in a mechanical manner solely from PD parameters calibrated for Stage 1 exposures without appropriate adjustment for the higher risk profile and lifetime horizon of the exposure. F. Determination of the period over which Lifetime ECL is measured 46. The periods which are considered as the lifetime for estimating the ECL may vary for different types of financial instruments. In order to maintain consistency in the definition of lifetime, a bank shall be guided by the following for assessment of lifetime for different financial instruments: (1) Financial instruments without undrawn component: The maximum period to consider when measuring the lifetime ECL is the maximum contractual period (including extension options) over which the bank is exposed to credit risk and not a longer period, even if that longer period is consistent with business practice. (2) Loan commitments with undrawn components/ revolving facilities: (i) Loan with an undrawn commitment: In cases of such financial instruments, a bank’s contractual ability to demand repayment and cancel the undrawn commitment does not limit its exposure to credit losses to the contractual notice period. For such financial instruments the bank shall measure ECL over the period that the bank is exposed to credit risk and ECL would not be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period. When determining the period over which the bank is exposed to credit risk on the financial instrument, it should consider factors such as relevant historical information and experience on similar financial instruments. The measurement of expected credit losses shall take into account credit risk management actions that are taken once an exposure has increased in credit risk, such as the reduction or withdrawal of undrawn limits. (ii) Revolving loan commitments without auto renewal (working capital demand loans, cash credit, overdraft facilities): The maximum period to consider when measuring ECL shall ordinarily be the maximum contractual period, including extension options, over which the bank is exposed to credit risk. However, the renewal date may be considered as the relevant point for measurement only when the bank is able to demonstrate, through documented policy and observed practice, that the renewal process is substantive in nature and results in a fresh and effective reassessment of the borrower’s credit risk. For this purpose, the bank shall evidence that, at the time of such renewal, there are instances of significant changes to terms and conditions, including reduction or withdrawal of limits, enhancement of security, revised pricing, or non-renewal depending on the changes in financial and other conditions of the borrower, as applicable. This assessment may be undertaken at individual, or where appropriate, at a portfolio level. (iii) Revolving facilities with auto renewal as per contract (Example: credit cards): In the case of such facilities, the bank shall determine the period over which expected credit losses are to be measured based on the period for which it is exposed to credit risk. For this purpose, the bank shall analyse the historical data, including default patterns, drawdown behaviour and the effectiveness of actions such as reduction, suspension or cancellation of limits. (3) Guarantee: The period over which ECL shall be measured is the maximum contractual period over which the bank has a present contractual obligation to pay or perform as per the terms of the contract. G. Probability-weighted outcome 47. The purpose of estimating ECL is neither to estimate a worst-case scenario nor a best-case scenario. The estimate of ECL shall reflect an unbiased and probability-weighted amount, determined by evaluating a range of possible outcomes. 48. For the above purpose, a bank shall use multiple scenarios with each scenario representing the relationship between the key components of ECL and the relevant macroeconomic variables. 49. The probability weight assigned to each scenario shall be determined by the bank inter alia taking into account historical experience and expert judgement, as appropriate. The above shall be subject to oversight under the bank’s approved governance framework. H. Effective Interest Rate 50. ECL for a financial instrument originated/invested on or after April 1, 2027 shall be computed using the EIR determined at initial recognition 4 . ECL for a POCI financial asset originated on or after April 1, 2027 shall be computed using the “Credit-adjusted effective interest rate”. Further, the opening ECL as on April 1, 2027 (computed based on the balance sheet position as on March 31, 2027) may, at the discretion of the bank, be calculated using contractual interest rate as the discounting factor, in the interim. However, ECL computation for all such outstanding loans shall be fully migrated to EIR regime on or before March 31, 2030. 51. While calculating the effective interest rate, a bank shall estimate the expected cash flows by considering all the contractual terms of the financial instrument (for example, prepayment, extension, call and similar options) but shall not consider the expected credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate transaction costs, and all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the bank may use the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments). 52. Fees that are an integral part of the effective interest rate of a financial instrument include origination fees received by the bank relating to the creation and acquisition of a financial asset and commitment fees received by the bank to originate a loan. 53. Transaction costs include fees and commission paid to agents (including employees acting as selling agents), advisers, brokers and dealers etc. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. 54. ECL on loan commitments shall be discounted using the effective interest rate, or an approximation thereof, that will be applied when recognising the financial asset resulting from such commitment. In the case of revolving facilities and guarantee contracts for which the EIR cannot be determined directly, the bank shall apply a discount rate that reflects the current market assessment of the time value of money and the risks that are specific to the cash flows. I. Collateral 55. For computation of ECL, the estimate of expected cash shortfalls shall reflect the cash flows expected from collateral and other credit enhancements that are part of the contractual terms of the financial instrument, to which the bank has a valid recourse. The estimate of expected cash shortfalls on a collateralised financial instrument reflects the amount and timing of cash flows that are expected from sale of the collateral, less the costs of obtaining and selling the collateral. In respect of Stage 3 financial instruments, for exposures beyond ₹7.5 crore, the collateral charged in favour of the bank shall be valued at the time of classification and thereafter, at least once every two years, by the valuers appointed, as per the bank’s internal policy. In case of stock, such valuation shall be undertaken at least annually. Frequency of valuation of other exposures may be determined as per the internal policy of the bank in this regard. J. Building Blocks for Computing ECL J.1 Governance Framework 56. The internal policy and governance framework of a bank shall cover all material aspects of the ECL lifecycle. The bank’s Board of Directors shall be responsible for oversight of the implementation and ongoing functioning of the ECL Framework. 57. A committee of the Board, or a Board-approved committee, including the Chief Financial Officer (CFO) and Chief Risk officer (CRO), shall oversee robust implementation of the ECL framework. The focus area of the subcommittee shall inter alia include: (1) reviewing and challenging the ECL implementation strategy adopted by the management. (2) Checking whether the ECL computation methodologies and assumptions used are consistent and are in alignment with the risk management practices. (3) Ensuring data integrity throughout the entire lifecycle of ECL computation. (4) Ensuring an effective and robust governance and control frameworks over ECL estimation. (5) Ensuring complete independence of internal model validation function and suitability of the coverage. (6) Ensuring high-quality transition as well as ongoing disclosures. (7) Ensuring compliance with applicable regulations, internal policies and procedures. J.2 Credit Risk Drivers 58. A bank shall have a sound credit risk assessment and measurement process. The processes, systems, tools and data used for computation of ECL shall, to the extent relevant, be consistent with and drawn upon those used for credit risk assessment. Such common processes, systems, tools and data may include credit risk rating systems, estimated PDs (subject to appropriate adjustments), past-due status, loan-to-value ratios, product type, collateral type etc. 59. A bank shall have an effective credit risk rating/scoring system where each “credit risk grade/range of score” is clearly defined and consistently applied, and which accurately grades differing credit risk characteristics, identifies changes in credit risk on a timely basis, and prompts appropriate action. 60. An effective “credit risk rating/scoring system” shall comprehensively capture the varying level, nature and drivers of credit risk that may manifest themselves over time in a financial instrument, to reasonably ensure that all lending exposures are properly monitored and that ECL allowances are appropriately measured. J.3 Data Aggregation and Management 61. The credit risk data collected by the bank shall be sufficiently granular to enable meaningful assessment of the borrowers’ credit profile and to ensure that borrowers with similar risk characteristics are appropriately segmented together. 62. A bank shall develop comprehensive processes for the identification, assessment and management of data quality risks associated with data used as inputs to models or otherwise used at various stages of ECL computation. Such processes shall be applicable to both internal and external data. The bank shall also ensure effective management of historical data. 63. During the process of data aggregation, whether internal or external, a bank shall avoid material inconsistency or selective use of data, as the same may result in inaccurate or biased ECL outcome. A bank may exclude certain information during data aggregation only where such exclusion does not have a material impact on the ECL computation. 64. A bank shall maintain sufficient historical loss data, covering an adequately representative period, to provide a meaningful basis for analysis of its credit loss experience for use as a starting point in estimating the level of loss allowances on an individual or collective basis. In determining the period of such data, the bank shall take into account the nature of the portfolio, data availability, and the need to capture variations across business cycles and associated outliers. J.4 Segmentation of Exposures 65. A bank shall group exposures into segments with shared credit risk characteristics so that the bank can reasonably assess changes in credit risk and thus the impact on the estimate of ECL. A bank’s methodology for segmenting exposures to assess credit risk shall be documented and subject to appropriate review and internal approval. 66. The basis of grouping into a segment shall be reviewed periodically, to ensure that exposures within the group remain homogeneous in terms of their response to credit risk drivers. 67. Segments identified at initial recognition based on similar credit risk characteristics may not necessarily remain appropriate subsequently, given that the relevant characteristics and their impact on the level of credit risk for the group may change over time. In such cases, the grouping of exposures into various segments shall be re-evaluated and exposures shall be re-segmented where relevant new information is received, or where changes in the bank’s expectations of credit risk so warrant. 68. Exposures shall not be grouped in such a way that an increase in the credit risk of a particular exposure is masked by the performance of the group as a whole. J.5 Forward looking information 69. A bank shall, at each reporting date, include borrower-specific factors, general economic conditions and an assessment of both the current as well as the forecasted macroeconomic variables in the assessment of ECL. While estimating ECL over longer time horizons, which may involve greater estimation uncertainty and judgment, a bank may rely on internal projections based on available and reasonable information. 70. Historical information shall serve as an important anchor for measurement of ECL. However, a bank shall adjust the risk

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/DOR/2026-27/398 · issued 27 Apr 2026. The plain-English explanation above is BankPulse’s own independent summary.

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