Banks seek talks on crop loan ECL norms

New Delhi: Banks want more deliberations on the expected credit loss (ECL) framework applicable to crop loans.Lenders have argued that the Stage 2 classification of crop loans should be linked to the crop season and pitched a classification similar to that of Kisan Credit Card (KCC) loans, which are linked to the agricultural crop cycle. "We have discussed this with other lenders, including private banks, and will make a representation to the Reserve Bank of India," said a bank executive aware of the developments. Under the proposed framework applicable from April 2027, a loan account will come under Stage 2 after it is 30-90 days past due.Banks had earlier argued that under existing norms, both SMA 1 and SMA 2 category assets require a 0.4% provision, but under the proposed ECL norms, they will be treated as Stage 2 assets, which require a lifetime probability of loss with a regulatory floor of 5%. "In the case of farm loans based on the crop cycle, there are frequent rollovers both backward and forward, therefore, this differential provision of 4.6% is quite steep and should be narrowed down," said another bank executive.127494220 In its draft norms the banking regulator has proposed that crop loan will be classified as non-performing or Stage 3 if it remains overdue for two crop seasons (rabi-rabi or kharif-kharif, as the case may be) in the case of short-duration crops and one crop season in the case of long-duration crops.Under the proposed norms, a financial instrument is said to be under Stage 2 when it has had a significant increase in credit risk (SICR) since initial recognition but is not considered to be 'credit impaired'. For such financial instruments, lifetime ECL will be recognised.Last year, in a research note, ratings agency ICRA had stated that banks, particularly those operating with thinner capital cushions and with higher overdue books, high sanctioned but undisbursed limits and high non-fund-based exposures, are likely to see more transitioning pain and would need to raise capital and/or avail the transition period till FY31 to phase out the impact on CET-1.It also noted that most of the impact will be visible in the Stage 2 segment, as currently these are classified as standard assets and carry lower provisions than the specified ECL floors. It estimated the impact of this to be in the range of 10 bps to 20 bps on the reported CET-1 ratio for the sector.