Under the proposed Expected Credit Loss (ECL) framework,

Solution

As per the RBI’s discussion paper on the Expected Credit Loss (ECL) framework, banks must classify applicable financial assets into three stages depending on the credit risk relative to the time of initial recognition: • Stage 1 → Assets with no significant increase in credit risk (or those with low credit risk) since initial recognition. Banks recognize 12-month ECL for these assets. • Stage 2 → Assets that have experienced a significant increase in credit risk since initial recognition but do not yet show objective evidence of impairment. Banks must recognize lifetime ECL here. • Stage 3 → Assets that show objective evidence of impairment or default. These are treated as credit-impaired, and banks must recognize lifetime ECL. This classification system aligns Indian practices with global standards like IFRS 9, enabling a forward-looking approach for provisioning.