RBI Notifies Reserve Bank Of India (Commercial Banks – Asset Classification, Provisioning And Income Recognition) Directions, 2026

RBI, by notification dated 27.04.2026¹ , has notified the RBI (Commercial Banks – Asset Classification, Provisioning and Income Recognition) Directions, 2026 (“Asset Master Directions”).

The salient features of the Asset Master Directions are as follows:

(i) Applicability: The Asset Master Directions apply to ‘Commercial Banks’, i.e., banking companies (other than Small Finance Banks, Payments Banks and Local Area Banks), corresponding new banks and the State Bank of India, as defined in the Banking Regulation Act, 1949

(ii) Expected Credit Loss framework: Earlier, provisioning was based on an “incurred loss” approach. Under the Asset Master Directions, the Expected Credit Loss (“ECL”) framework requires banks, at every reporting date, to estimate the credit losses they expect to incur in future on each in-scope financial instrument, with ECL being a probability-weighted average of credit losses across different scenarios that incorporate historical experience and forward-looking information, including macroeconomic conditions.

(iii) ECL stagewise Asset grouping: Every asset under the scope of the Asset Master Directions is assigned to one of the following three stages based on the changes in credit risk since initial recognition and whether it is credit-impaired at the reporting date:

(a) Stage 1 covers assets that have not experienced a significant increase in credit risk since its origin, for which ECL from possible default events over the next twelve months are recognised;

(b) Stage 2 covers assets where credit risk has increased significantly since its origin but which are not yet credit-impaired, for which ECL over the entire remaining life are recognised;

(c) Stage 3 covers credit-impaired assets, for which lifetime ECL are recognised along with stricter income-recognition norms. A central feature is the “significant increase in credit risk” threshold, i.e., unless rebutted with robust, well-documented evidence, a payment more than thirty days past due is presumed to indicate such an increase and triggers movement from Stage 1 to Stage 2.

(iv) Applicability of ECL on debt: ECL framework applies to loans, all qualifying debt securities not measured at fair value through profit or loss, trade receivables, lease receivables, loan commitments (including undrawn portions), financial guarantee contracts and other off-balance-sheet credit exposures that give rise to a contractual right to receive cash, while investments in subsidiaries, associates and joint ventures are expressly excluded.

(v) Effective Interest Rate: The Asset Master Directions mandate that, for financial instruments originating or invested on or after 01.04.2027, ECL must be computed using the Effective Interest Rate (“EIR”), i.e., the rate that exactly discounts estimated future cash flows through the expected life of the instrument to the gross carrying amount of a financial asset, determined at initial recognition, and for credit-impaired assets ECL must be computed using a credit-adjusted EIR. For opening ECL as on 01.04.2027, which shall be based on the balance sheet as on 31.03.2027, banks may, as a transitional measure, use the contractual interest rate as the discount factor, but ECL computation for all such outstanding loans must completely migrate to the EIR regime by 31.03.2030.

The Asset Master Directions shall come into force on 01.04.2027.

Footnote

1 Reserve Bank of India (Commercial Banks - Asset Classification, Provisioning and Income Recognition) Directions, 2026

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