The RBI is proposing to introduce expected loss-based approach for provisioning during 2023-24 as part of its measures to strengthen the bad loan resolution ecosystem. This will enable banks to design their own credit loss models and spread the higher provisions over a five-year period under a newer system of setting aside money for lending.

“In addition, the finalisation of guidelines on the securitisation of stressed assets, and a comprehensive review of the prudential framework (including the guidelines on the resolution of stress in respect of projects under implementation) are also likely to be undertaken during the year with the objective of further strengthening the resolution ecosystem.

“...policy measures, such as guidelines on the introduction of expected loss-based approach for provisioning are likely to be announced during 2023-24,” RBI said in its Annual Report 2022-23.

The RBI in January this year released a discussion paper on the expected loss-based approach for provisioning. The banks will have to classify financial assets, including primary loans, irrevocable loan commitments and investments classified as held-to-maturity or available-for-sale, into one of the three categories — Stage 1, Stage 2, and Stage 3, depending upon the assessed credit losses on them.