RBI to formalise expected credit loss framework, project finance and issues guidelines to curb mis-selling of financial products
MUMBAI:
RBI
will formalise the expected credit loss (ECL) framework for banks and issue guidelines to curb mis-selling of financial products by regulated entities (REs), including third-party offerings.
These reforms, highlighted in its annual report, are part of RBI's broader effort to enhance financial sector resilience amid growing risks from technology, cyber threats, and climate change.
The ECL framework marks a shift from the current incurred loss model to a forward-looking approach, aligning Indian banks with global norms. This transition, long in the works, is expected to improve credit risk recognition and provisioning discipline, potentially increasing short-term provisioning but making bank balance sheets more shock-absorbent over time.
RBI conducted impact studies in phases since 2022 to assess readiness and calibrate implementation.
Also on the cards is the implementation of new project finance guidelines, which were proposed earlier but were deferred from being implemented in FY25 by the new governor Sanjay Malhotra after he took charge.
The reforms proposed in the last fiscal include increasing provisions on delayed projects by as much as 5%
The planned mis-selling guidelines follow rising concerns over aggressive sales practices, particularly the cross-selling of insurance and investment products often to senior citizens to whom these products are not suited.
by Taboola
by Taboola
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The new rules will hold REs accountable not just for their own products but also for those sold through third-party tie-ups, with stricter conduct norms and disclosure standards.
The department of regulation will also issue final norms for co-lending arrangements, revise securitisation guidelines for stressed assets, and release updated rules on income recognition and asset classification. As part of its Basel III rollout, RBI will issue credit risk norms, finalise market risk guidelines, and update disclosure requirements.
Climate-related risks remain a key focus. RBI will publish disclosure norms, launch a climate risk data system, and issue supervisory principles.
It will also review the green deposits framework and issue norms for sustainability-linked loans.
Other planned reforms include revising internet and mobile banking regulations, setting differentiated norms for Type I NBFCs, and digitising regulatory processes through the new Regulatory Application Management System (RAMS).
A consolidation of existing circulars into thematic master directions is also underway. The department of supervision will strengthen liquidity stress testing, tighten oversight of payment and small finance banks, and improve monitoring of digital infrastructure uptime.
For urban cooperative banks and NBFCs, RBI will consider migrating them to risk-based supervision and review AML practices. A thematic review will examine whether NBFCs are adhering to interest rate caps set by RBI.
RBI's fintech arm will expand central bank digital currency pilots, add B2C features to the unified lending interface, and upgrade its fraud detection tool MuleHunter.ai. It will also frame standards for the ethical use of AI in finance. Consumer protection will be reinforced through an overhaul of the ombudsman scheme and issuance of a new grievance redress framework. RBI will also upgrade its complaint handling system.
The financial stability department will develop liquidity stress tools for NBFCs, extend stress testing to cooperative banks, and model climate transition risks in carbon-heavy sectors. It will also build a growth-at-risk model to assess future economic vulnerabilities.
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