RBI tightens bad loan classification norms to align with globally-accepted standards

The Reserve Bank of India (RBI) has tightened the rules governing classification of bad loans, definition, and recovery, to align with globally-accepted standards, effective April 1, 2027, according to the Master Directions released on Monday. These Directions are intended to further strengthen credit risk management practices, improve comparability across regulated entities, and align the regulatory framework more closely with internationally accepted financial reporting principles, the central bank noted. The most critical element is a shift from how banks recognise bad loans and set aside provisions. Banks will now move from the old incurred loss model to a forward-looking Expected Credit Loss (ECL) model. It has also amended norms for the resolution of stressed assets by adding certain changes. These changes will come into effect from April next year, and follow a draft feedback opportunity given by the RBI in October last year.