Punjab National Bank has announced that it expects to incur additional provisioning around ₹9,000-10,000 crore as it transitions to the Reserve Bank of India’s new Expected Credit Loss (ECL) framework.
In an interview, PNB’s Managing Director & CEO, Ashok Chandra, said the bank’s preliminary calculations show a 75-80 basis point (0.75-0.80%) hit to its capital‐to‐risk assets ratio (CRAR) under the new rules.
The estimated impact of ₹9,000-10,000 crore is being spread over a multi‐year period (five years) starting from the implementation of the rules.
Background: What are the RBI’s New ECL Rules?
- The RBI has introduced a draft framework requiring banks to adopt an “Expected Credit Loss” (ECL) model—moving from the current “incurred loss” model (recognising losses after default) to a more forward-looking approach (provisioning for potential default before it happens).
- Under ECL, loans are classified into stages (Stage 1, Stage 2, Stage 3) based on credit risk, and banks must make provisions accordingly. Stage 2 assets (performing but showing higher risk) are likely to see major provisioning increase.
- Banks must transition to the new framework by April 1, 2027, with a five-year phase-in.
Why PNB is Significant and Why the Impact Matters
Why PNB’s Estimate is Important
- As a large public sector bank, PNB’s disclosure of a specific provisioning estimate provides a benchmark for other banks in India, many of which are still evaluating the impact.
- The hit of ~₹9,000-10,000 crore is non-trivial—it reflects the magnitude of change coming for the banking sector.
Key Implications
- Capital Adequacy: PNB estimates a CRAR reduction of ~0.85 percentage points due to the transition.
- Profit Absorption: Even though the provisioning is spread over years, profits will need to absorb the additional cost, which may affect dividend, growth and lending.
- Risk Management: The requirement signals a shift in risk management approach—from reacting to defaults to proactively planning for them.
- Impact on Lending: Banks may become more cautious in higher risk segments (SME, agriculture, retail) as provisioning burdens rise.
What PNB is Saying and Its Action Plan
- PNB asserts its CRAR is strong, at ~17.19% as of September 30, 2025.
- The bank plans to absorb the provisioning through internal accruals (profits) without needing immediate capital raise.
- It expects retail segments such as housing and vehicle loans to grow and support future earnings. Moneycontrol
- PNB is actively evaluating its asset quality, monitoring Stage 2 exposures (loans showing stress but not yet default) which will drive much of the provisioning need.
What This Means for the Banking Sector
- The move to ECL is likely to affect all banks, with large players disclosing their provisioning/impact targets in due course.
- Investors will monitor capital ratios, provisioning trends, and profit margins more closely. Banks with high Stage 2 exposure may be under scrutiny.
- Lending rates and credit growth could be impacted: if banks need to set aside more for potential losses, they may tighten underwriting or raise margins for riskier borrowers.
- Long-term benefit: The shift improves transparency and resilience—banks will be better prepared for future loan stress and the systemic risk may reduce.
Risks and Things to Watch
- Timing & Implementation Risk: The five-year transition gives time, but regulatory tightening or unexpected loan stress could accelerate impact.
- Hidden Exposures: If a bank underestimates Stage 2 or 3 exposures, the provisioning burden may be higher than planned.
- Profitability Pressure: If provisioning compresses profits, banks may delay lending, boost fee income, or reduce costs aggressively.
- Capital Raises: Some banks may need to raise fresh capital if internal accruals are insufficient and provisioning drags on buffer.
- Macro Risk: Adverse macro events (economic slowdown, industry stress) could simultaneously raise defaults and increase provisioning beyond initial estimates.
Conclusion
In summary, PNB’s expectation of ₹9,000-10,000 crore in additional provisioning under the RBI’s new ECL regime is a signal of significant regulatory and accounting change for the Indian banking industry. While PNB appears confident in managing the transition through profits and strong capital base, the shift marks a structural change in how banks recognise credit risk and manage their balance sheets. For investors, banking sector watchers and borrowers alike, this development warrants attention.
