RBI Reforms: Bank Strength & Credit Flow Boost

New Delhi, Oct 13 (PTI) Global rating agencies on Monday said the RBI's recent reform package is likely to strengthen the operating environment of banks and provide more room for the banks to keep credit flowing to the broader economy.

S&P Global Ratings said the RBI's proposal to implement an expected credit loss (ECL) framework and revised Basel III norms reflects strategic timing, allowing banks to benefit from economic growth prospects.

"The implementation of ECL by April 1, 2027, with a five-year transition, will give banks time to fine-tune their models, gather data, and smooth out the impact of ECL provisioning on profitability and capital," it said in a statement.

Higher capital ratios anticipated under Basel III reforms can cushion ECL provisions, S&P added.

The RBI last week released draft norms on ECL-based provisioning for banks' stressed loans, which will replace the current incurred loss-based norms that banks use to make provisions.

The RBI plans to apply the ECL framework from April 1, 2027, moving away from the existing incurred-loss provisioning system and bringing India into line with international standards. Banks will be allowed to smooth out provisioning adjustments until March 2031.

Fitch Ratings believes the RBI's recent package of reforms will be broadly positive for the country's financial sector, with an improved regulatory framework likely to strengthen the bank operating environment, the agency said in a statement.

The RBI also proposed several other measures that enhance credit flow to the economy. These include relaxation of risk weights to certain sectors, such as unrated micro, small and medium enterprises (MSME) and residential real estate.

Credit availability will also be eased for large corporates, including for acquisition financing and operational infrastructure projects, S&P said.

"We believe the RBI's measures could push credit growth in the Indian banking system toward the upper end of our 11.5-12.5 expectation," said S&P Global Credit Analyst Shinoy Varghese.

Relaxation of regulatory guardrails in certain areas could also incentivise some borrowers to pivot toward cheaper bank financing versus markets such as private credit, potentially reshaping credit demand dynamics, S&P said.