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Finance Ministry Spurs PSB Buffers
4 Jun
Summary
- PSBs directed to build extra provisioning for stressed loans.
- New expected credit loss regime to increase provisions.
- Measures aim to strengthen balance sheets before FY28.
The finance ministry has directed public sector banks (PSBs) to enhance their provisioning buffers for retail, MSME, and agriculture loans. This proactive measure aims to fortify banks against emerging stress in these sectors. The directive comes as banks prepare for the Reserve Bank of India's proposed Expected Credit Loss (ECL) framework, slated for rollout by FY28.
This new ECL regime requires lenders to provision based on anticipated future losses, a shift from the current incurred-loss approach. This will likely increase credit costs and impact profitability, especially for Stage-2 or SMA-2 accounts, which show early signs of repayment stress. The move is the most significant effort to bolster bank reserves since the COVID-19 pandemic.
