ECL impact: Banks could hike loan rates, re-draw lending strategy, experts say

Expected credit losses will help banks gain deeper insights into portfolio composition
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The Reserve Bank of India’s proposed expected credit loss (ECL) guidelines may prompt banks to increase loan prices and adjust their lending approaches if finalized without changes, according to financial analysts.

“Implementing expected credit loss accounting will enable financial institutions to conduct more nuanced portfolio analysis. This could lead to more accurate risk-based pricing strategies or strategic shifts toward clients and products offering more favorable risk-adjusted returns. Many institutions are already moving in this direction, and ECL adoption will significantly enhance data-driven decision making,” stated Vivek Iyer, financial services leader at Grant Thornton Bharat.

Earlier reports indicated regulators might approve banking institutions’ appeal to reduce stage-2 loan provisioning from the proposed 5% to between 1-3%. This request emerged as current provisioning for standard assets stands at 0.4%, with segments like housing and auto loans demonstrating approximately 50% recovery rates from delinquent accounts classified as NPAs. Stage-2 assets typically represent loans overdue by 61-90 days.

New Approach to Risk Assessment

Financial sector consultant Abizer Diwanji emphasized that ECL adoption represents a fundamental shift in banking methodology. Institutions will need to rigorously examine historical data, including default patterns and market fluctuations, to calculate expected losses. Previous delays in adopting IFRS standards stemmed from undercapitalization and elevated NPA levels—conditions that no longer prevail.

“This accounting framework requires institutions to embed expected loss projections into lending decisions at origination. Consequently, credit pricing will likely transition toward genuine risk-based models rather than the current discretionary approaches,” Diwanji explained.

A senior public sector banking executive noted that proposed regulations could increase lending rates by 5-10 basis points at major institutions, with potentially greater impacts at mid-sized and smaller lenders. Institutions with significant exposure to unsecured credit may shift toward secured lending products.

Key Implications

1- ECL implementation enables advanced portfolio analysis, supports precision pricing, and facilitates strategic portfolio optimization

2- Banking sector proposes reducing stage-2 loan provisioning to 1-3% versus draft guidelines’ 5% requirement

3- Lending rates projected to increase by 5-10 basis points post full implementation at major banks

Published on December 24, 2025