Regulatory relaxation on housing and MSME loans provides a crucial buffer for Indian lenders against new credit loss norms.

Canara Bank predicts revised RBI risk weights will cushion the financial impact of the upcoming Expected Credit Loss framework.

The Reserve Bank of India recently relaxed risk weights for specific loan sectors. Major lenders anticipate a smoother transition to the new Expected Credit Loss framework. Canara Bank expects these regulatory adjustments to cushion its upcoming provisioning requirements significantly. 

This ECL framework forces banks to recognise probable future loan losses much earlier. Consequently, Indian banking rules will soon align closer with global financial standards. Canara Bank estimates that this shift could require roughly Rs 10,000 crore in additional provisions. 

However, the public sector lender remains optimistic about managing this financial burden. Hardeep Singh Ahluwalia recently noted that relaxed risk weights will release additional capital. Ahluwalia serves as the managing director and chief executive officer designate for the bank. 

Robust internal profitability provides a substantial buffer for the Bengaluru-based institution. The bank currently generates annual profits approaching Rs 20,000 crore. Therefore, officials believe this income easily absorbs the gradual transition impact. 

Management plans to amortise the provisioning burden over four years. This strategy reduces immediate pressure on both profitability and capital ratios. Ahluwalia clarified that upfront provisioning would barely dent their capital adequacy ratio. 

The central bank issued final Basel III directions late last month. Regulators eased several strict provisions from the previous draft framework. For instance, officials raised the threshold for applying higher risk weights on unrated corporate exposures. 

The revised threshold increased to Rs 500 crore from the earlier Rs 200 crore. The RBI also scrapped proposed higher risk weights for previously rated borrowers. Instead, long-term unrated bank exposures now carry a uniform 100 per cent risk weight. 

The regulatory retail framework now covers all small businesses earning up to Rs 500 crore. The exposure ceiling per counterparty also increased to Rs 10 crore. Ultimately, released capital buffers will partially offset expected credit loss pressures.

(Source: BFSI)

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