New Delhi: Shares of Indian lenders fell after the regulator tightened rules that will require banks to set aside more capital against potential losses on their loan and credit portfolios.
The NSE Nifty Bank Index fell 1% on Tuesday, compared to a 0.4% decline in the broader market. The Nifty Private Bank Index was trading 0.8% lower while the Public Sector Bank Index was down nearly 2%. Macquarie Capital Securities analyst Suresh Ganapathy said in a note that while most private banks are conservative as they provide more for overdue loans and carry contingent buffers, state-run lenders usually avoid such practices, leaving them staring at potentially higher provisioning needs.
Under the new rules that are in alignment with global norms, banks will be required to divide loans into three stages depending on future risk assessment, the Reserve Bank of India said in a statement late Monday. Moving to an expected credit loss framework, which the RBI had proposed in early 2023, would mean banks across the board will have to set aside more capital for future loan losses, potentially leading to lower profits and weighing on their net worth, analysts said.
The transition to tougher norms is estimated to trim overall capital adequacy of banks by approximately 40-to-70 basis points, according to Jefferies, a brokerage house.
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The new approach requires lenders to estimate credit losses based on forward-looking estimates rather than wait for stress to materialize before making provisions. The tighter norms comes at a time when non-performing loans in India’s banking sector are at multi-year lows, allowing the regulator an opportune window to strengthen buffers.
“This is a three-layer expected credit loss provisioning that encompasses tighter assessment of significant credit risk, interest rate-based income recognition and adequate capital buffer,” said Rajosik Banerjee, a partner at KPMG India.
Lenders will continue to follow existing non-performing asset rules, where loans are classified as bad if repayments are overdue by 90 days, the RBI said. The new directions will come into effect from April next year, despite push back from lenders to delay implementation.
Globally, both the International Accounting Standards Board and the US Financial Accounting Standards Board have adopted provisioning standards that require the use of ECL models, rather than an “incurred loss” model wherein banks provide for losses that have already occurred. The RBI had first come out with draft directions in October 2025.