According to RBI’s discussion paper on the Expected

Solution

The transitional adjustment amount represents the difference between: • Provisions computed under the extant incurred loss-based provisioning norms, and • Provisions required under the newly proposed Expected Credit Loss (ECL) framework, net of tax effects. As per the RBI’s discussion paper: • This transitional adjustment amount will be added back to the Common Equity Tier 1 (CET 1) capital. • The relief is temporary and will be phased out over a maximum of five years, though banks may choose a shorter transition period. • This approach provides banks with capital adequacy relief during the initial years of implementation, ensuring a smoother transition to the ECL model. Thus, the recommended treatment is to add back the transitional adjustment amount to CET 1 capital.