Mumbai: The Reserve Bank of India (RBI) has introduced a revised framework for recognising stressed assets, marking a significant shift in how banks assess credit risk and provide for potential losses. The move is expected to have a direct impact on borrowers, influencing loan approvals, EMIs, and overall access to credit in the coming years.

Shift to forward-looking risk assessment

At the core of the new framework is the transition from the traditional “incurred loss” model to a forward-looking Expected Credit Loss (ECL) approach. Under the earlier system, banks made provisions only after a loan showed clear signs of stress or turned into a non-performing asset (NPA).

With the ECL model, banks will now be required to anticipate potential defaults and set aside funds in advance. This proactive approach is aimed at strengthening the financial system by ensuring that risks are recognised earlier rather than after significant deterioration.

Experts believe this change aligns India’s banking norms more closely with global standards, making the system more resilient to economic shocks.

Three-stage classification system introduced

The RBI’s revised framework introduces a structured three-stage classification for stressed assets:

  • Sub-standard asset: A loan that has remained an NPA for up to 12 months
  • Doubtful asset: A loan that continues in the sub-standard category beyond 12 months
  • Loss asset: A loan where loss has been identified by the bank, auditors, or RBI inspection, but has not yet been fully written off

This classification will help banks better track the progression of stressed loans and take timely corrective measures.

90-day NPA rule remains unchanged

Despite the overhaul, the RBI has retained the existing 90-day norm for identifying NPAs. This means a loan will still be classified as non-performing if repayments are overdue for more than 90 days.

However, the new framework adds an additional layer of monitoring by requiring banks to flag borrower accounts as overdue as part of their day-end processes, regardless of when those processes are executed.

Importantly, the RBI has clarified that NPA classification will apply at the borrower level. If a borrower has multiple loans with a bank and even one of them turns into an NPA, all exposures to that borrower will be treated as NPAs. This could significantly affect borrowers with multiple credit lines.

What it means for borrowers

For individuals and businesses, the changes could lead to tighter lending standards. Since banks will now account for potential risks earlier, they may become more cautious while approving loans.

Borrowers with lower credit scores or irregular repayment histories may find it harder to secure loans. Even existing borrowers could face stricter monitoring, especially if they have multiple outstanding loans.

In terms of EMIs, the impact may not be immediate. However, over time, banks could adjust interest rates or lending terms to reflect the higher provisioning requirements under the ECL framework.

Impact on banks and financial markets

The transition to the new system is expected to be operationally challenging for banks. They will need to develop robust data systems, risk models, and forecasting tools to comply with the ECL requirements.

Jatin Kalra, Partner at Grant Thornton Bharat, described the framework as a “significant milestone” in strengthening India’s prudential norms. He noted that while the RBI has incorporated industry feedback and provided transitional arrangements, banks will still need to invest heavily in upgrading systems and processes.

The immediate market reaction reflected investor concerns. Shares of several public sector banks declined following the announcement. Stocks of Bank of India and Bank of Baroda fell by up to 3 per cent, while Canara Bank, Punjab National Bank, Bank of Maharashtra, and State Bank of India recorded losses between 1.5 per cent and 2.5 per cent.

Long-term benefits for the economy

While the new norms may initially tighten credit availability, they are expected to improve the overall health of the banking system in the long run. By identifying stress early and ensuring adequate provisioning, the RBI aims to reduce the risk of large-scale loan defaults and banking crises.

A stronger banking system can ultimately benefit borrowers by ensuring more stable lending conditions and greater confidence in financial institutions.

Conclusion

The RBI’s move to tighten NPA rules marks a major reform in India’s banking sector. While borrowers may face stricter credit conditions and banks will need to adapt to new systems, the long-term objective is clear — to build a more resilient, transparent, and risk-aware financial ecosystem. As the transition unfolds, both lenders and borrowers will need to adjust to a more disciplined credit environment.