RBI proposes framework for banks to classify financial assets based on credit losses

Press Release: 2022-2023/1558, Dated 16.01.2023

The RBI has released a Discussion Paper that comprehensively examines various issues and proposes a framework for the adoption of an expected loss-based approach for provisioning by banks. The key requirement under the proposed framework shall be for the banks to classify financial assets into 1 of the 3 categories – Stage 1, Stage 2, and Stage 3, depending upon the assessed credit losses on them.

Further, the banks would be allowed to design and implement their own models for measuring expected credit losses for the purpose of estimating loss provisions in line with the proposed principles.

Also, the expected credit loss models proposed to be adopted by the banks shall have to be independently validated to verify whether the models follow the guidance issued by the RBI, based on sound reasoning, calibrated use of relevant data that is available with the bank and, whether proper back-testing and internal validation of the models have been done to remove any bias, etc.

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