The ECL framework transition is raising concerns among Indian banks. Lenders have approached the Reserve Bank of India (RBI) seeking a delay. They fear rising bond yields could trigger significant valuation losses and weaken their capital positions.

The new framework is scheduled to take effect on April 1, 2027. Banks want either a postponement or an alternative accounting treatment for their held-to-maturity (HTM) investment portfolios.

Banks Seek Relief From HTM Valuation Rules

The benchmark 10-year government bond yield climbed to 7.48% in October. Higher crude oil prices, rising US yields and expectations of further interest rate hikes drove the increase. Although the yield eased to 7.15% on Monday, it remains above the 6.75% recorded at the end of June.

Under the ECL framework, banks must adopt the effective interest rate method and value their HTM portfolios at fair value as of March 31, 2027. The difference between the existing carrying value and fair value will be adjusted through reserves, potentially affecting capital positions.

However, this will be a one-time adjustment. Banks will not need to mark their HTM portfolios to market subsequently.

Treasury officials said higher yields could increase valuation losses during the transition. Banks have therefore sought a delay of around one year to prepare for the changes and reduce the financial impact.

Discussions are also underway through the Indian Banks' Association (IBA) and the Fixed Income Money Market and Derivatives Association of India (FIMMDA).

Also Read: Understanding SIF in India: The New Investment Category by SEBI

Key Highlights:

• Banks want a one-year delay in implementing the investment portfolio requirements.
• Lenders have questioned the need for fresh fair-value adjustments to HTM securities.
• Canara Bank has increased its estimated one-time provisioning requirement to ₹12,000–15,000 crore.

Banks Propose Alternative Accounting Treatment

Lenders have also suggested allowing securities to remain at their acquisition cost under the 2024 investment guidelines. This could help them avoid additional mark-to-market losses during the transition.

Another proposal is to retain the existing HTM accounting treatment while adopting the effective interest rate method.

Banks raised these concerns during the second-quarter earnings season, highlighting the potential impact of higher bond yields.

Canara Bank has increased its estimated one-time provisioning requirement to ₹12,000–15,000 crore from ₹10,000–12,000 crore earlier. Indian Bank is also preparing for a potential valuation impact exceeding its earlier estimate of ₹3,500 crore.

The RBI's response to the banks' requests will be important as lenders prepare for the transition to the new ECL framework.