Question
As per the RBI’s discussion paper on the introduction
of the Expected Credit Loss (ECL) framework for provisioning by banks, to which category would the proposed framework apply?Solution
The proposed Expected Credit Loss (ECL) framework for banks is designed to replace the current incurred loss model with a forward-looking approach. The framework would apply to financial assets that meet prescribed conditions, including: • Loans and advances • Irrevocable loan commitments (including sanctioned revolving credit facilities) • Lease receivables • Irrevocable financial guarantee contracts • Investments classified as held-to-maturity or available-for-sale These financial assets must be measured at amortised cost, following the business model of collecting contractual cash flows, and must satisfy the SPPI (Solely Payments of Principal and Interest) criterion. Thus, the ECL framework’s applicability is restricted to certain financial assets, not liabilities.
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