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      Question

      As per RBI's discussion paper on ECL model for banks

      what is the recommended treatment for the transitional adjustment amount in relation to the adoption of the ECL approach?
      A The transitional adjustment amount should be deducted from the Common Equity Tier 1 (CET 1) capital. Correct Answer Incorrect Answer
      B The transitional adjustment amount should be excluded from the calculation of capital ratios. Correct Answer Incorrect Answer
      C The transitional adjustment amount should be added back to the CET 1 capital. Correct Answer Incorrect Answer
      D The transitional adjustment amount should be treated as a separate provision and accounted for separately. Correct Answer Incorrect Answer
      E The treatment of the transitional adjustment amount is not specified in the proposal. Correct Answer Incorrect Answer

      Solution

      It is proposed that the transitional adjustment amount, i.e., the difference between the accounting provisions held on adoption of ECL approach as on the effective date and the provisions computed as per the extant provisioning norms, net of tax effects, may be allowed to be added back to the Common Equity Tier 1 (CET 1) capital. This benefit shall be phased out over a maximum five years. Banks may also choose to spread the transition over a shorter period.

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