March 22, 2023

India’s central bank will soon issue a discussion paper on its proposal on expected loss-based approach for loan loss provisioning by banks.

To bolster measures for converging with globally accepted prudential norms, the Reserve Bank of India today proposed that the country’s lenders should adopt expected loss approach for loss allowances required to be maintained by them in respect of their exposures.

“The inadequacy of the incurred loss approach for provisioning by banks and its procyclicality, which amplified the downturn following the financial crisis of 2007-09, has been extensively documented. One of the major elements of the global response to these findings have been a shift to expected credit loss (ECL) regime for provisioning,” the central bank said in the statement on developmental and regulatory policies.

The RBI has also decided to introduce a framework for securitisation of stressed assets in addition to the Asset Reconstruction Companies route, similar to the framework for securitisation of standard assets.

The central bank will thus also issue a discussion paper on relevant contours of the proposed framework shortly inviting comments on certain specific aspects.

In September 2021, the central bank had issued the revised framework for securitisation of standard assets and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 currently provides a framework for such securitisations to be undertaken by ARCs. However, it has decided on the new framework now based on market feedback, stakeholder consultations and the recommendations of the Task Force on Development of Secondary Market for Corporate Loans.

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