Mumbai: A three-digit number could soon play a far greater role in determining who gets access to loans in India. With the Reserve Bank of India‘s Expected Credit Loss (ECL) Direction, 2026 set to come into effect from April 1, 2027, borrowers may face increased scrutiny based on their credit profiles as banks adopt a more forward-looking approach to risk assessment.

The new framework is aimed at strengthening the banking sector by ensuring lenders set aside adequate funds for potential loan defaults. While financial experts have largely welcomed the move as a measure to improve banking stability, concerns have emerged that it could make credit access more difficult for millions of borrowers with limited or evolving credit histories.

What is the ECL framework?

The Expected Credit Loss framework requires banks to estimate potential future loan losses and maintain higher provisions against those risks.

Unlike the existing system, which largely responds to defaults after they occur, the ECL model requires lenders to continuously evaluate the probability of future defaults using various financial indicators and borrower behaviour patterns.

The objective is to improve the resilience of the banking system and prevent the build-up of bad loans that have affected Indian banks in the past.

Financial analysts estimate that the increased provisioning requirements could reduce banking sector profits significantly, prompting lenders to adopt more cautious lending practices.

Why credit scores may become more important

Under the new regime, credit scores are expected to become an even more critical factor in loan approval decisions.

Industry experts suggest that borrowers with credit scores below 730 could face stricter evaluations, higher interest rates, reduced loan eligibility or additional collateral requirements.

A credit score reflects an individual’s borrowing history, repayment behaviour and overall creditworthiness. Higher scores generally indicate lower lending risk, making such borrowers more attractive to financial institutions.

As banks seek to minimise provisioning burdens under the ECL framework, they may increasingly prioritise customers with stronger credit profiles.

Impact on first-time borrowers

One of the major concerns surrounding the new norms relates to individuals with limited credit histories.

Many first-time borrowers, young professionals, self-employed individuals and those working in the informal sector often have lower or thinner credit profiles despite maintaining responsible financial habits.

Financial experts warn that these borrowers may find it harder to access affordable credit even if they have never defaulted on a loan.

In many cases, a lower credit score may reflect a lack of borrowing history rather than poor repayment behaviour.

As a result, some analysts fear that the framework could unintentionally widen the gap between borrowers with established financial records and those still building their credit footprint.

Formal and informal sectors may be affected differently

The new system is expected to have varying effects across different segments of society.

Individuals employed in the formal sector with stable incomes, regular banking activity and established credit histories are likely to find it easier to meet lender requirements.

However, workers in the informal economy, small traders, daily wage earners and self-employed individuals may face greater challenges because of irregular income patterns and limited access to formal credit channels.

Experts caution that without complementary reforms, the framework could contribute to a two-tier credit environment where access to affordable finance becomes increasingly concentrated among financially established customers.

Financial inclusion concerns

India has made significant progress in expanding access to banking services over the past decade through initiatives promoting financial inclusion and digital payments.

Programmes such as Jan Dhan Yojana and the widespread adoption of digital payment systems have brought millions into the formal financial ecosystem.

However, access to credit remains a challenge for a large section of the population.

Some experts argue that while the ECL framework strengthens financial stability, it should be accompanied by measures that help underserved borrowers build and improve their credit profiles.

These may include secured credit products, simplified dispute resolution systems, micro-credit pathways and financial literacy initiatives aimed at educating consumers about credit scores and responsible borrowing.

Need for greater awareness

A key concern highlighted by financial observers is the lack of public awareness regarding credit scores and their growing influence on borrowing decisions.

Millions of Indians remain unfamiliar with how credit scores are calculated, how they can be improved and how they affect loan eligibility.

Experts believe that financial literacy campaigns will be essential before the framework comes into effect in 2027 to ensure borrowers understand the implications of the new system.

Improved awareness could help consumers take proactive steps to maintain healthy credit records and strengthen their financial standing.

Balancing stability and access

The RBI’s objective behind the ECL framework is to enhance the stability and resilience of the banking system by ensuring lenders prepare for potential risks before they materialise.

Most experts agree that stronger risk management practices are necessary to avoid a repeat of past bad-loan crises that affected India’s banking sector.

At the same time, they emphasise the importance of ensuring that efforts to strengthen financial institutions do not unintentionally restrict access to credit for deserving borrowers.

As the implementation date approaches, policymakers, banks and regulators are expected to focus on balancing financial prudence with broader goals of inclusion and economic opportunity.