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If you are planning to take out a loan for a new home, a car, or your children's education in the near future, this news is crucial for you. The Reserve Bank of India (RBI) is introducing a new regulation for banks known as the 'ECL (Expected Credit Loss) Direction-2026'.

This rule is set to come into effect nationwide on April 1, 2027. Its implementation will completely transform the way loans are issued within the banking sector. Let us understand in detail what this rule entails and how it will impact the general public.

What is the RBI's new ECL rule?
Under the current system, banks typically take action only after a loan has completely defaulted or a customer fails to pay installments (EMIs) for 90 consecutive days. This is classified as an NPA (Non-Performing Asset), prompting banks to set aside funds from their own reserves to cover the loss. However, the introduction of the new rule will change this entire process.

What will change under the new rule?
The new ECL rule stipulates that banks need not wait for a loan to actually default. Instead, they must anticipate potential future defaults and set aside significant funds from their own reserves in advance, based on the assessed risk. Missing just two installments could require banks to set aside up to 12 times more capital than previously required. Setting aside these funds effectively removes them from the banks' core business operations, potentially reducing the banking sector's profits by approximately ₹42,000 crore.

The RBI has revised regulations across various loan tenures; consequently, the impact will extend beyond banks to the borrowers themselves. Delay in installment | Current amount set aside by banks | Amount to be set aside under new rules
1 to 30 days late | ₹10,000 | ₹25,000
31 to 60 days late | ₹10,000 | ₹1.25 lakh (A massive 12-fold increase!)
Over 91 days (NPA) | ₹3.75 lakh (15%) | ₹5.00 lakh

How will this affect those with a CIBIL score below 730?
A matter of concern is that approximately 62% of loan applicants in our country have a CIBIL score below 730. Under the new rules, obtaining a loan will become a major challenge for these individuals; banks will prioritize applicants with scores above 730, while those with lower scores may face higher interest rates or be required to provide more collateral (guarantees).

Whenever a bank perceives a customer's CIBIL score as low and identifies a risk of default, it may take certain measures, such as:

Directly rejecting loan applications from individuals with weak profiles.
Significantly raising interest rates to cover the risk, even if the loan is approved.
Demanding higher collateral (such as property, gold, or a guarantor).

How will banks assess the risk?
Before granting a loan, banks will not merely look at your current salary; under the ECL framework, they will evaluate you based on these six stringent criteria:

Payment history: Have you ever delayed a bill payment or an EMI in the past?
CIBIL score fluctuations: Has your score risen or fallen over the last few months?
Income instability: Is your income fixed, or does it fluctuate?
Job security risk: How secure is the sector or company you work for? Loan-to-Value (LTV) Ratio: The amount of loan you are seeking relative to the value of the property you are purchasing.

Existing Debt: The outstanding loans or credit card bills you currently have.
Banks will now focus on wooing the 38% of premium customers in the country who have a CIBIL score of 730 or higher; there are approximately 70 million such customers nationwide. Banks will offer loans at lower interest rates and on very easy terms to those with good scores. Experts believe that these norms are excellent for making the Indian banking system safer and more robust, but it is now time for ordinary customers to exercise caution.

Disclaimer: This content has been sourced and edited from Dainik Jagran. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.