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    Question

    According to RBI’s discussion paper on the Expected

    Credit Loss (ECL) model for banks, how should the transitional adjustment amount be treated at the time of adopting the ECL framework?
    A It should be deducted from the Common Equity Tier 1 (CET 1) capital. Correct Answer Incorrect Answer
    B It should be excluded from the calculation of capital ratios. Correct Answer Incorrect Answer
    C It should be added back to the CET 1 capital. Correct Answer Incorrect Answer
    D It should be treated as a separate provision and accounted for independently. Correct Answer Incorrect Answer
    E The treatment of the transitional adjustment amount is not specified. Correct Answer Incorrect Answer

    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.

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