Banks are pushing for more deliberations with the Reserve Bank of India on the expected credit loss framework applicable to crop loans. According to The Economic Times, lenders have argued that the Stage 2 classification of crop loans should be linked to the crop season and pitched a classification similar to that of Kisan Credit Card loans, which are linked to the agricultural crop cycle. A bank executive aware of the developments stated that discussions have been held with other lenders, including private banks, and a representation will be made to the RBI. The push for regulatory dialogue comes as the banking sector globally moves toward implementing ECL models in accordance with international standards like IFRS 9, which aim to enhance oversight and accountability in financial institutions.
Under the proposed framework applicable from April 2027, a loan account will come under Stage 2 after it is 30-90 days past due. As reported by The Economic Times, banks had earlier argued that under existing norms, both SMA 1 and SMA 2 category assets require a 0.4% provision, but under the proposed ECL norms, they will be treated as Stage 2 assets, which require a lifetime probability of loss with a regulatory floor of 5%. Another bank executive noted that in the case of farm loans based on the crop cycle, there are frequent rollovers both backward and forward, therefore, this differential provision of 4.6% is quite steep and should be narrowed down. The implementation of comprehensive ECL models represents a significant shift toward risk-based supervision frameworks that align with global banking standards.
In its draft norms, according to The Economic Times, the banking regulator has proposed that crop loan will be classified as non-performing or Stage 3 if it remains overdue for two crop seasons (rabi-rabi or kharif-kharif, as the case may be) in the case of short-duration crops and one crop season in the case of long-duration crops. Under the proposed norms, a financial instrument is said to be under Stage 2 when it has had a significant increase in credit risk since initial recognition but is not considered to be 'credit impaired'. For such financial instruments, lifetime ECL will be recognised. This framework aligns with international practices where ECL models are being integrated to enhance the foundation of credibility and trust in banking operations.
Last year, in a research note, ratings agency ICRA had stated that banks, particularly those operating with thinner capital cushions and with higher overdue books, high sanctioned but undisbursed limits and high non-fund-based exposures, are likely to see more transitioning pain and would need to raise capital and/or avail the transition period till FY31 to phase out the impact on CET-1. According to The Economic Times, ICRA also noted that most of the impact will be visible in the Stage 2 segment, as currently these are classified as standard assets and carry lower provisions than the specified ECL floors. It estimated the impact of this to be in the range of 10 bps to 20 bps on the reported CET-1 ratio for the sector. The transition to ECL frameworks is part of a broader global trend toward creating more resilient financial environments that meet regulatory expectations and foster stakeholder confidence.