RBI's ECL move may hit capital position of smaller private banks

Over the past 5-10 years, the probability of default would have been very high for the banking sector and that's why eventual ECL provisions could be higher

The Reserve Bank of India’s (RBI’s) discussion paper suggesting banks migrate to an expected credit loss (ECL) approach for provisioning of bad assets is likely to have a bearing on the capital position of smaller banks, analysts have said. 

According to them, while large private banks, such as HDFC Bank, ICICI Bank, and Axis Bank, are well placed and could see release of provisions, smaller lenders, including City Union Bank, DCB Bank, and Equitas Small Finance Bank, may have to accelerate provision buffers and raise capital faster than intended.

The RBI’s discussion paper, released on Monday, proposed an ECL-based approach