Fresh Wave Of Bank Mergers May Force RBI To Defer ECL Framework Implementation

A merger of banks will aggravate the challenges for lenders in implementing the new framework within the stipulated two years. The RBI announced ECL implementation for scheduled commercial banks by April 1, 2017.  

Merger of banking giants require tedious realignments of operations, risks, technology and process along with other systems which include customer and human resource management.

“Amid this mammoth task, ECL implementation will only add pressure,” a senior public sector bank official said.

Impact On Stressed Firms, Industries

Now, a deferment of the ECL framework may bring relief to a large number of exporters and micro, small, and medium enterprises, caught in unprecedented uncertainties arising from the US tariff policies.

“We have been exporting to the US and with the tariff issues, our sales have drastically fallen and we are even struggling to service our (bank) loans despite several measures out in place by the government,” a mid-sized exporter from Noida, who did not wish to be identified, told The Secretariat.

Needless to say that the MSME sector is already facing severe challenges amid trade and tariff uncertainties. 

Even as banks have been granted a four-year period to realign provisions on the existing loans, the mandate to move to the ECL framework in less than two years could lead to a slowing of loans to several MSMEs with weak credit assessment records, as banks will have to outline the possible loss on account of future loans.

Despite a healthy double-digit credit growth for MSMEs, stress levels amid uncertainties over trade and tariffs have increased.

Servicing of MSME loans has been under the spotlight as they are regularly being hit by delayed payments from overseas buyers.

“Some of the smaller banks have a relatively high concentration in unsecured retail and microfinance portfolios — segments that have faced recent stress — making this a particularly difficult time to absorb the impact of higher provisions,” Jatin Kalra, Partner, Grant Thornton Bharat told The Secretariat.

Crisil Ratings has already projected a rise in non-performing assets—loans that do not perform—on account of MSME stress. The NPAs of MSMEs could increase up to 3.9 per cent by the financial year end from the current 3.5 per cent due to the US tariff hike.

“Since the new framework is a step forward and requires setting up of a proactive credit assessment, there is a possibility that lenders slow down credit to a few vulnerable sectors. We will have to wait and watch to come up with an assessment,” a senior banker said.

The framework would require banks to collate relevant data, even from the past, to be able to make an assessment of ECL.

ECL Framework And Its Implementation Challenges

The new framework is aimed at significantly improving risk management. India’s lenders will have to put in place elaborate preparations at the earliest to make the switch seamless.

The ECL module, aligned with the International Financial Reporting Standards (IFRS), will strengthen overall governance while improving data quality and collation, and transparency in processes.

A Grant Thornton Bharat report said that timely planning, cross-functional collaboration, and strong model management will be critical for successful adoption.

Though the regional rural banks, cooperative banks, and small finance banks have been exempted from moving to this new framework, a few scheduled commercial lenders will face hurdles as well.

“For smaller banks, adopting the ECL framework would pose significant operational and data challenges. They might struggle in consolidating extensive, multi-year databases on loan defaults, recoveries, and collateral values that the model relies upon,” Kalra said, adding that a few lenders may also be less equipped in areas such as economic forecasting and predictive credit risk modelling.

Until now, the framework was based on "incurred loss" arising from defaults. Even as the RBI has now decided to provide a breather to those categorised as small finance banks, regional rural banks, and cooperative banks, several lenders may find it difficult to navigate and put in place the required framework, especially with the government’s merger exercise for public sector banks.

The report further highlighted that the “tight timeline will require banks to achieve implementation readiness by conducting parallel runs, enhancing systems, and investing in data and analytical capabilities.”

Sources said that this is expected to be an issue, especially for the lenders that haven’t achieved the required scale.

The next few months will be critical for the country's banking sector, irrespective of the implementation of ECL timelines. Banks will have to get down to the drawing board to finalise the nitty gritties even if the RBI decides to defer the framework.

Implementation of ECL will have to be a well-thought-out strategy. That apart, it will augur well even for those banks that have been exempt from adopting the framework for the time being, to start the transition exercise. Sooner or later, these lenders will also be required to come on board.