The Reserve Bank of India is considering a proposal to tweak expected credit loss (ECL) framework amid concerns the rules could weigh on small- and mid-sized companies already facing pressure from the West Asia crisis. According to The Economic Times, the framework may result in higher borrowing costs for small and mid-sized firms as rating agencies recently exceeded default rate benchmarks. The ECL guideline sets strict default thresholds across rating categories, which are linked to banks' capital requirements, creating potential unintended consequences for smaller businesses. If a rating agency breaches these thresholds, lenders must assign higher risk weights to all borrowers in that category, increasing borrowing costs even though the ratings themselves remain unchanged.
The observed default rate (ODR) criterion tracks historical defaults within each rating category, with specific benchmarks for different rating grades. As per The Economic Times, the ODR benchmark for BB-rated companies is 0.40-1%, while for BBB-rated firms it is 0.20-0.40%. Most small- and mid-sized firms fall into these two categories, making them particularly vulnerable to the framework's impact. An analysis shows all seven rating agencies have breached the ODR in the BB category, implying that risk weights for small and medium-sized firms could rise despite no change in their individual credit profiles. Bankers noted that while the ECL framework had initially reduced risk weights for BB-rated loans to 100%, these benefits may not accrue to borrowers due to ODR breaches, with banks instead assigning a 150% risk weight.
The issue was discussed with the RBI at a recent meeting, with rating agencies urging the central bank to consider a more prospective approach. According to The Economic Times, rating agencies argued that reliance on backward-looking data could distort risk assessments given the framework requires agencies to use a four-year historical dataset from April 2023 to March 2027, a period marked by disruptions linked to global conflicts and supply chain shocks. Industry participants expressed concerns that the framework could prompt borrowers to shift to larger agencies, reinforcing market dominance by established players and weakening competition. Agencies have also flagged inconsistencies between RBI and market regulator SEBI's benchmarks, which could lead to differing treatment of the same borrower across loans and bonds.
The Reserve Bank of India has issued stern warnings against misleading loan waiver campaigns that are targeting vulnerable borrowers experiencing financial distress. According to the RBI, any scheme promising an unconditional waiver of bank loans is a scam and should be reported to the authorities immediately to prevent further exploitation of vulnerable citizens. The central bank emphasizes that no individual, private agency, non-governmental organization, or unauthorized third party possesses the legal authority to grant, promise, or facilitate a waiver of loans acquired from regulated entities. The RBI mandates that borrowers must address all issues, grievances, and requests related to loan repayment directly with their respective lending institutions to ensure any modifications to loan terms are legally documented and enforceable within the banking system.
Experts recommend specific steps for borrowers facing harassment. They should document everything including call recordings, screenshots, messages, dates, names, and phone numbers, complain to the bank first by writing to the grievance redressal officer or nodal officer, and escalate to RBI through their Complaint Management System if the issue remains unresolved. Kumar noted that borrowers may have remedies under both regulatory and criminal law frameworks depending on the nature of misconduct. Jha advised that the biggest mistake is avoiding communication altogether, as many people stop answering calls because they are stressed or scared, but that often makes matters worse. The proposed framework emphasises that recovery is as vital to lending as disbursement, if not more, and seeks to correct the imbalance by requiring lenders to uphold the same standards of fairness, transparency and discipline during recovery as at the time of origination.
