Credit Risk Management Rules modified: RBI brings revised norms on Related Party Lending and Contracting

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– Team Corplaw | corplaw@vinodkothari.com

Continuing with the spree of regulatory changes brought in 2025, RBI has issued Amendment Directions on Lending to Related Parties by Regulated Entities. Separate notifications have been issued for each regulated entity, based on the draft Directions for lending and contracting with related parties issued on 3rd October, 2025. We discuss the changes brought in for commercial banks by way of the RBI (Commercial Banks – Credit Risk Management) – Amendment Directions, 2026 and RBI (Commercial Banks – Financial Statements: Presentation and Disclosures) – Amendment Directions, 2026. 

Highlights:

  • New rules apply from 1st April, 2026. Existing facilities, if in breach of the new provisions, can continue to run down; however, shall not be renewed or extended
  • Related Party: the meaning of the word is quite different from the commonly understood expression under the SEBI Regulations or Companies Act. Hence, banks will maintain a parallel list of related parties under the CRM Directions
    • Primarily concerned with directors, KMPs and their interested persons and entities
    • Related party = Related person (RP) + Reciprocally Related person (RRP) + Specific entities in which RP or RRP are interested
  • Contracts or arrangements enumerated in sec. 188 (1) of Companies Act also covered
  • Lending to or contracts with Specified Employees
    • means employees 2 levels below the Board or as designated by the Board 
    • left to the Policy to be framed by the Bank
    • To be reported to the Board annually 
  • Board approved Policy on CRM
    • To include aspects related to lending to RPs 
    • Specify aggregate limits and sub-limits for lending to RPs including single RPs
    • To incorporate whistleblower mechanism to raise concerns over questionable loans to RPs and quid pro quo arrangements 
    • Any deviation from policy to be reported to Audit Committee 
  • Restrictions on lending by banks 
    • to its promoters and their relatives; shareholders with shareholding of 10 per cent or more in the paid-up equity capital of the bank; as also the entities in which they (promoters, their relatives and shareholders as stated above) have significant influence or control (as defined under Accounting Standards Ind AS 28 and Ind AS 110).
    • In addition to restrictions on lending to directors and interested entities under section 20 of BR Act
  • “Materiality threshold” for lending to related parties
    • based on the capital of the bank – from Rs 5 crores to Rs 25 crores 
    • lending over the materiality threshold requires approval of board/ a committee on lending to RPs
    • Does not include (i) credit facilities fully secured by cash or liquid securities, and (ii) interbank loans
  • Committee on lending to RPs 
    • Bank may identify any existing committee, other than the Audit Committee
    • Does it mean the Audit Committee cannot sanction approval for loans to RP? 
  • Recusal of interested parties from deliberations and discussions on loan proposals, contracts or arrangements involving them or their related parties 
  • Internal auditors to review, on a quarterly or shorter intervals, adherence to the guidelines and procedures in relation to related party lendings.

Immediate Actionables 

  • Designate a board committee for sanction of loans to related parties beyond materiality thresholds 
  • Identify and maintain a list of related parties as per the definition under the Amendment Directions 
  • Modify and adopt a revised Credit Risk Management Policy in line with the requirements of the Amendment Directions 
  • Adopt limits and sub-limits for (a) aggregate transactions with RPs, (b) transactions with each RP and (c) transactions with a group of RPs 
  • Sensitise relevant business teams on the materiality thresholds and the internal Credit Policy of the Bank 
  • Engage the services of internal auditors for periodic review (quarterly or shorter intervals)

RPT Framework: Amendment Directions vis-a-vis Companies Act and LODR

Point of comparison CRM Amendment Directions Listing RegulationsCompanies Act
Scope of coverageLoans, non-funded facilities, investment in debt securitiesAny transfer of resources, obligations or servicesContracts as enumerated u/s 188 (1)
Meaning of related partyDirectors, KMPs, promoter, their relatives, entities in which either of them have specified interest (partnership, shareholding, control, etc).Does not include Company’s own holding company, subsidiaries or associatesWide definition, including sec 2 (76) of CA, accounting standards, promoter, promoter group entities, shareholders with 10% or more shareholdingAs defined in sec. 2 (76), primarily including directors, KMPs, their relatives, private cos where such persons are a director or member, public companies with directors’ 2%  shareholdings.Includes entity’s own subsidiaries, associates, JVs, holding company
Concept of “reciprocally related party”In line with the statutory restrictions, includes directors/relatives on the boards of other banks, AIFIs, trustees of mutual funds set up by other banksDoes not exist; however, a purpose-and-effect test exists whereby surrogate transactions may be covered.Does not exist
Primary approving bodyCommittee on Lending to Related Parties, or the BoardAudit CommitteeAudit Committee; or the Board
Shareholders’ approvalNot requiredRequired if crossing materiality thresholdRequired if not on in ordinary course of business+ arm’s length, and crossing materiality threshold
Materiality thresholdBeing linked with a single loan exposure, ranges from Rs 5 crores to Rs 25 crores depending on Bank’s capitalBeing aggregated for transactions during a FY, ranges from 10% of the entity’s consolidated turnover to Rs 5000 crores based on consolidated turnover of the entity Usually based on 10% of turnover or net worth (depending on transaction type)

RPTs: Understanding the exact nature of Omnibus Approval

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– Pammy Jaiswal | corplaw@vinodkothari.com

Understanding the exact nature of Omnibus ApprovalDownload

Click here to watch the related video.

Our other resources:

  1. Related Party Transactions- Resource Centre
  2. SEBI approves relaxed norms on RPTs 
  3. Moderate Value RPTs : Interplay of disclosure norms and impracticalities

The Sabka Bima Sabki Raksha Insurance Bill: The 2047 Vision in action

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– Vinita Nair and Saloni Khant | corplaw@vinodkothari.com

Being the 10th largest[1] in the world, the Indian Insurance market grows at 32-34%[2] annually but insurance penetration is only at 4.2% of the GDP[3]. With a view to boost the growth in the sector and implement the vision of ‘”Insurance for All by 2047’, amendments in the existing insurance laws were placed before the public for consultation in November, 2024. Following the due process of legislation, the draft bill underwent several changes and was passed by both the houses of the parliament on December 16 and 17, 2025 respectively and now awaits the assent of the president. The Bill introduces fundamental reforms by liberalising foreign investments and reducing capital requirements but at the same time, strengthens regulatory oversight on the market participants with additional measures to protect the interest of the policyholders.

Read more →

The fine line between gossip and truth: conflicting rulings on price sensitive information disclosure

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– Saloni Khant, Executive | corplaw@vinodkothari.com

If there is a truth that the market needs to know, it is the duty of the company to let the market know it, no later than the truth becomes good for disclosure. It is no good for the company to sit smirking and watch unofficial media reports do rounds, even if these unofficial reports are as close to the truth as the company would have revealed. The duty to reveal does not get over with seeing the truth out through unofficial means. In fact, that raises even a larger concern: one, that the company failed its duty to speak the truth, and two, if the company did not reveal it, how did the market know it, and know almost the whole of the truth.

This is the law that we learnt and believed. This is the law that the SC in its December 2, 2025 ruling laid. This is the law that was reinforced by a clear language specifically amended vide the SEBI (PIT) (Amendment) Regulations, 2024. 

However, insider trading matters always tend to become so very case-specific that every case seems to say a different story. Some cases tell a story that one may not like to carry or use as a precedent, for example, the order dated December 12, 2025 by the Quasi-Judicial Authority, SEBI, in the matter of a large listed entity. 

In this article, we discuss what would be construed as “unpublished”, hence, UPSI, in the light of the recent SC order vis-a-vis recent and past rulings of SEBI on the subject. 

Meaning of UPSI

The definition of UPSI, as given under Reg 2(1)(n) of the PIT Regulations, 2015, contains the following elements: 

(i) There is an information

(ii) The information relates to the company or its securities, directly or indirectly

(iii) The information is not generally available, that is, unpublished.

(iv) The information is likely to materially affect the price of the securities upon becoming generally available, that is, price-sensitive. 

A list is also given, of information that would ordinarily be considered UPSI. 

Thus, in order to be construed as UPSI, both “unpublished” and “price-sensitivity” shall be present. In the absence of one of these, the information does not remain UPSI. In order to qualify as “unpublished”, the same shall not be “generally available information”. 

Generally available information and unverified media reports 

Generally available information is defined under Regulation 2(1)(e) as 

“Information that is accessible to the public on a non-discriminatory basis and shall not include unverified event or information reported in print or electronic media.”

The phrase “shall not include unverified event or information reported in print or electronic media” was inserted pursuant to the SEBI (PIT) (Amendment) Regulations, 2024 following the Consultation Paper dated December 28, 2023. 

The CP pertained to verification of market rumours, and proposed that: 

In case the listed entity has classified certain information as UPSI and the entity neither confirms, denies or clarifies market rumour pertaining to such information published in the media, then such media reports should not be used later by an insider as a defence that the information was ‘generally available’.

Thus, an unverified media report does not constitute “generally available information”. 

Verdict of Supreme Court

In its order dated December 2, 2025, the Supreme Court upheld a penalty of Rs. 30 lakh on a listed entity for non-disclosure of UPSI to the stock exchange when the information had already been widely disseminated by news agencies. It upheld that 

‘Selective leakage of the information, howsoever accurate or otherwise or complete or in bits and pieces, does not discharge the company from its responsibility of making prompt disclosure to make it generally available, more so when such information has been classified by company as UPSI.’

Recent Order passed by SEBI contrary to SC’s verdict 

In a later order dated December 12, 2025, the charges against the alleged insiders were leakage of UPSI and trading while in possession of UPSI. The alleged UPSI in the instant case was acquisition of a company in the same sector which would lead to a major increase in operational capacities. The Company disclosed the same officially only on execution of the share purchase agreement on May 19, 2025, while several press reports appeared about the very same news on May 16, 2025 and May 17, 2025. In its order, the Quasi Judicial Cell (QJC) , SEBI dropped charges against the company primarily on the ground that the “news” was already in public domain. The QJC has reproduced extracts from several such media reports, none of which were based on a disclosure made by the company.  Based on these reports, QJC held that the information “ceased to be UPSI as it was available on non- discriminatory basis and became generally available information after the publication of the news reports”. The QJC cited several past rulings to support its view, even though, before the QJC order dated December 12, 2025, rulings of SAT as also the December 2, 2025 ruling of SC were also available, and not cited in the QJC Order. 

Is this order one of its kind, or does it serve as a precedent? If it serves as a precedent, then it seems to be unsettling the law, apparently settled after the specific amendment made in May 2024. 

We take note of the various rulings in the matter.

A. Rulings favouring unverified media reports as “unpublished” or “selectively available” information 

In a February 2021 order,  SEBI held that statements made by the Chairman/ Managing Director of a company in response to an interview to select news channels does not result in making an information “generally available”. This was based on the reason that: 

“The said information was very fluid and nebulous as it was bereft of specific details as to how this restructuring will ultimately be executed. Questions and response to the questions posed during the interview were varied and did not contain all the information in uniform/structured manner.”

In a November 2020 order, it was observed that news reports about an UPSI without any specific details and supporting evidence for its contents does not result in making that UPSI generally available. 

In a June 2020 order, SEBI, referring to the definition of “unpublished” under the 1992 Regulations, held that media reports are speculative in nature, and hence, unless published by the Company, cannot be treated as published information.

B. Rulings favouring unverified media reports as “generally available” information 

The recent December 12 order of SEBI draws reliance on various past rulings on the subject. The same has been briefly discussed below. 

An appeal against a SEBI order, back in 1998, decided by the then Appellate Authority (erstwhile Ministry of Finance) observed:

“For information to be generally known, it is not necessary that it be confirmed or authenticated by the company as otherwise, it would fall within the scope of ‘published by the company.

xx

Information which was published in press reports despite non -acknowledgement by the Company, was generally available/ known information if ‘there are strong reasons to believe that the impending merger, though not formally acknowledged or published, was in one sense generally known and UTI’s denial of knowledge cannot be implied to mean that market in general had no information in this regard.”

This order attempted to distinguish between “unpublished” and “generally available” information. However, following the said order, the 1992 Regulations were amended by a 2002 amendment to clarify that – “Speculative reports in print or electronic media shall not be considered as published information”. 

In a December 2023 order of SAT where the information in relation to a proposed merger became available in public domain through news articles, digital media, etc, such media-published information was considered as making the information “generally available”. 

“Thus, the contention of the respondent that the term “generally available information” means only the information which has been disseminated on the platform of the stock exchange is taking a very narrow and restrictive view. Whereas information published on the stock exchange would constitute generally available information, it would also follow that any information accessible to the public on non-discriminatory basis would also be generally available information.

Thus, publication of information regarding the transaction which was reported in multiple prince and digital publication including Economic Times, The Hindu Business, Business Lines, The Money Control, etc. wherein the nature of transactions was highlighted in depth clearly leads to an irresistible conclusion that information of the transaction was generally available”.

A similar view was taken by SEBI in an October, 2020 order where based on the wide viewership of the media, the UPSI was considered to become generally available. 

In a January 2018 order, SEBI held that UPSI related to receipt of a show cause notice becomes public from the date of its publication in a specific newspaper.

Leakage of UPSI

Parallel to the disclosure requirements applicable on the company, the leakage of UPSI through media reports also require companies to do an inquiry into the source of the leakage, and review of the internal processes to monitor and avoid any future instances of leakage of UPSI. 

Conclusion 

Despite the above QJC Order, we are of the view that the duty to make truthful disclosure is that of the company; the company cannot either remain silent, or treat media gossip as the revelation of truth. As Manusmriti 2.83 says: मौनात् सत्यं विशिष्यते. 

Author’s Comment: 
The  facts of the case in the 12th December ruling of SEBI pertain to a matter in 2021. The mandatory requirements with respect to rumour verification were first notified in 2023, with subsequent extension of dates to its applicability. Amendments in the definition of “generally available” information were also notified in May 2024. As such, the ruling is based on the position of law prior to such amendments, and is based on the views taken by SEBI and SAT in similar other matters.  
We understand that every quasi judicial decision is based on the facts of the matter, application of the law on the specific factual matrix, etc. In the instant case, the issue under consideration might have been whether, after the press releases precisely giving out the details of the matter, would there have been any additional information by the company, even if the company was to give its own disclosure.

Our other Resources:

  1. Failure to disclose price sensitive information: SC upholds penalties
  2. Prohibition of Insider Trading – Resource Centre
  3. Defining Duty: Extent of Liability of a Compliance Officer under Insider Trading Regulations

RBI Master Directions 2025:Consolidated RegulatoryFramework for NBFCs

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– Team Finserv | finserv@vinodkothari.com

RBI Master Directions 2025_ Comprehensive Regulatory Consolidation (1)Download

Read our articles on the topic here:

  • https://vinodkothari.com/2025/12/the-will-of-the-borrower-do-balance-transfers-count-as-loan-transfers/
  • https://vinodkothari.com/2025/12/rbi-consolidation-of-circulars/

Tracking Your Material Risks – Importance of Risk Register for NBFCs

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– Subhojit Shome | finserv@vinodkothari.com

Introduction

A Non-Banking Financial Company (NBFC), like other financial intermediaries,  operates in a risk-intensive environment where credit, operational, technology, liquidity and regulatory exposures evolve continuously. To manage these effectively, regulators and international standard-setters increasingly expect institutions to maintain a clear, documented, and continuously updated risk inventory. This document—commonly called a risk register—forms the backbone of an NBFC’s risk management framework. Standards such as ISO 31000 emphasise that organisations must maintain structured documentation of risks, controls and monitoring processes, while the Basel Committee recognises the importance of tools that consolidate information for oversight by senior management and boards. The Reserve Bank of India (RBI), through its compliance, operational risk, outsourcing, and information technology governance guidelines, also implicitly requires NBFCs to maintain evidence of risk identification, assessment and monitoring. Together, these expectations make a risk register not just a good practice, but an essential governance artefact.

This article explains what risk registers are, outlines the material risks relevant to NBFCs, describes the contents and structure of effective risk registers, discusses the merits of consolidated versus separate registers, and demonstrates how risk registers are used in practice.

What is a Risk Register?

ISO 73:2009 Risk management—Vocabulary defines a risk register as – record of information about identified risks. A risk register is a structured record that captures an organisation’s identified risks, the causes and consequences of those risks, the controls in place to manage them, the effectiveness of those controls, and the actions planned to further mitigate them. It is not merely a compliance document but a living tool that helps decision-makers view exposures at a glance, track risk levels, and allocate resources. The concept and practice are consistent with ISO 31000’s emphasis on systematic identification, assessment and treatment of risk.

For an NBFC, which must demonstrate proactive risk management under multiple RBI frameworks—including the SBR Master Directions, the operational risk guidance note, outsourcing guidelines, digital lending rules, and IT governance expectations—the register is foundational evidence of risk awareness and accountability.

Figure 1: An illustrative Snapshot of a Risk Register

Risks for Which NBFCs Should Maintain Registers

An NBFC typically faces a wide spectrum of material risks that require structured tracking. The most prominent among these is credit risk, arising from borrower defaults and delinquencies, portfolio deterioration and concentration exposures. NBFCs must also track liquidity risks, especially given their reliance on market borrowings and investor confidence. Operational risks, defined by Basel and adopted by the RBI as losses due to failed processes, people, systems or external events, form a substantial part of an NBFC’s potential vulnerabilities—from frauds and system outages to process gaps.

With increasing digitisation, IT and cybersecurity risks have become highly material. RBI’s guidelines on information technology governance frameworks require NBFCs to implement ongoing monitoring and incident tracking mechanisms, all of which depend on clear risk documentation. Similarly, third-party and outsourcing risks, emphasised by both RBI, are significant given NBFCs’ reliance on technology partners, collection agencies, loan service providers and outsourcing arrangements. NBFCs must also account for regulatory and compliance risks, model and data risks, and conduct and reputational risks that emerge from customer interactions and business practices. Finally, strategic and ESG-related risks are gradually gaining prominence in supervisory expectations.

Components of a Risk Register

Although institutions may customise formats, an effective risk register should contain certain core elements. Each entry should describe the risk clearly, including its causes, potential business impact, and the business unit or process where it arises. It should include an inherent risk assessment (before considering controls) and a residual risk assessment (after controls). Controls must be recorded along with their owners and the results of recent effectiveness testing. The register should also assign a responsible risk owner at a senior level to ensure accountability. Key Risk Indicators (KRIs), where relevant, should be linked to the risk entry along with thresholds, recent values and escalation triggers. Finally, each risk entry should reflect remediation actions, timelines and review dates to ensure the register remains a dynamic management tool rather than static documentation.

An actionable risk register should be concise, structured, and linked to governance and reporting. Recommended fields include:

Figure 2: Contents of a Risk Register

What an Enterprise-Wide Risk Register Looks Like

An enterprise-wide risk register (EWRR) consolidates the institution’s major risks across all business lines into a single, coherent view. In practice, this register acts as the central dashboard for senior management and the Board. It includes credit, operational, cyber, market, liquidity, compliance, strategic and reputational risks, each summarised in a uniform format. The EWRR provides an aggregated view of risk severity, risk levels, and concentration areas. For example, it may highlight that operational risks linked to IT outages are trending upward, or that credit risk concentration in a specific sector has crossed internal appetite thresholds.

Importantly, the EWRR does not replace detailed sub-registers maintained by specialised teams; instead, it integrates their findings. Basel supervisory materials emphasise consolidation as essential for Board oversight, and the EWRR serves precisely that purpose.

Separate Risk Registers vs an Enterprise-Wide Register

NBFCs often question whether it is more effective to maintain a single enterprise-wide register or individual registers for each risk category. Two common approaches exist: maintaining one enterprise-wide register (single source of truth) or maintaining focused registers (e.g., Operational Risk Register, Credit Risk Register) with a roll-up to an enterprise view. Both approaches are widely accepted; choice depends on size, complexity and risk-data capabilities.

In practice, the most effective approach is hybrid. Individual registers—for credit, operational, cyber/IT, third-party risk and others—allow specialised teams to capture detailed technical information, testing results, and granular observations. These feed into the enterprise-wide register, which provides the Board and CRO with clear, aggregated insights. Maintaining only the EWRR risks leads to oversimplifying important technical details, while relying exclusively on separate registers makes it difficult to achieve the consolidated oversight that regulators and Boards expect.

The best practice is to have a centralized ownership of taxonomy and scoring methodologies for the specialised risk registers and the EWRR. This is in accordance with para 32 of the Principles for Effective Risk Data Aggregation and Risk Reporting (BCBS), which states –

A bank should establish integrated data taxonomies and architecture across the banking group, which includes information on the characteristics of the data (metadata), as well as use of single identifiers and/or unified naming conventions for data including legal entities, counterparties, customers and accounts.

This fits in well with the hybrid approach where specialized registers maintained for detailed tracking but using a common data definition may be conveniently aggregated into a  governance-level enterprise register containing material risks, owners, KRIs and status for Board reporting.

Applications of a Risk Register in Practice

Risk registers influence nearly every stage of the risk management lifecycle. They support risk identification during new product assessments, process reviews and internal audit findings. They allow risk measurement through inherent/residual scoring and KRIs, ensuring early detection of deteriorating risk conditions. They facilitate the evaluation of controls, since internal audit and risk teams use the register as the primary record of what controls exist and how effective they are. Action plans arising from incidents, audits or supervisory observations are also tracked through the register, making it a central management tool.

Regulations call for a number of risk assessments including compliance risk assessment, ML/ TF risk assessment, information technology and cybersecurity risk assessment, outsourcing risk assessment, identification and assessment of operational risks, etc. NBFCs draw on the risk registers to supply the list of risk events, their inherent likelihood and consequence and provide the residual risks remaining with the company.

Risk registers are also a prerequisite for risk based internal audit. Risk registers, containing the list of internal controls, risk events and levels of inherent and residual risk, along with the Board’s risk appetite statement and tolerance limits form the basis of formulating the internal audit coverage. For more information on audit coverage refer to our write up here. 

For reporting, the register forms the basis of periodic risk reports, senior management dashboards and regulatory submissions where required. During supervisory reviews, the RBI often tests whether an NBFC can produce documented evidence of risk identification, control ownership, monitoring and remediation—exactly what a well-maintained register provides. In this way, the risk register becomes both a governance mechanism and a demonstration of compliance readiness.

RBI outsourcing directions emphasise documentation of material outsourcing arrangements and evaluation of outsourcing risk. A risk register is the optimum tool for such third-party risk management to track and escalate both foreseeable and actual outsourcing incidents and due-diligence findings.

Conclusion

For NBFCs, maintaining risk registers is not merely a procedural obligation; it is a critical part of the organisation’s risk culture and governance framework. International standards (ISO 31000), global supervisory principles (Basel Committee), and regulatory expectations all converge on the need for structured, documented, and regularly monitored risk inventories. A robust risk register—supported by discipline, clear ownership and periodic review—enables NBFCs to anticipate threats, strengthen controls, improve decision-making and satisfy supervisory expectations. As NBFCs continue to scale, digitalise and partner with third-party ecosystems, the importance of maintaining comprehensive, dynamic and enterprise-aligned risk registers will only grow.

Our other resources on risk management:

RBI Trade Relief Directions: How is your company impacted?

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– Team Finserv | finserv@vinodkothari.com

Call it Trump relief! The RBI announced relief measures on the 14th Nov to help the exporters of certain specified items, who may have availed export credit facilities from a regulated lender, whereby all regulated entities (REs) “may” provide a moratorium, from 1st September 2025 to 31st December, 2025. The grant of such a relief shall be based on a policy, consisting of the criteria for grant of the subject relief, and such criteria shall be disclosed publicly. Not only this, REs shall also make a fortnightly disclosure of the reliefs granted to eligible borrowers on a RBI format on Daksh portal.

The Reserve Bank of India (Trade Relief Measures) Directions, 2025 (‘Directions’) are applicable to NBFCs and HFCs as well. This is accompanied with amendment to Foreign Exchange Management (Export of Goods and Services) (Second Amendment) Regulations, 2025 for extension of the period for both realization/repatriation of export value (from 9 to 15 months) and the shipment of goods against advance payment (from 1 to 3 years).

Highlights:

  • Whether your company grants an export credit or not, if your borrower is the one who has availed export credit for export of specified goods or services, the borrower may approach you for the moratorium.
  • Are you bound to grant the moratorium? Answer is, no. However, basis a policy which is publicly hosted, you will consider the eligibility of the borrower. The relevant factors on which the eligibility will be examined may also form a part of the policy, and ideally, should include the extent of dependence on exports of specified items to the USA, tariff-based disruption in the cashflows, alternative markets and transitioning possibilities, etc.
  • Effective: Immediately. 
  • Actionables: (a) Framing of policy to consider the eligibility of affected borrowers; (b) Hosting the policy on public website; (c) Creating mechanism for receiving and transmission of borrower requests for the moratorium and giving timely responses to the same (d) RBI fortnightly reporting.

What is the intent?

To mitigate the disruptions caused by global headwinds, and to ensure the continuity of viable businesses.

Tariff impositions by the USA are likely to impact several exporters. There may be a ripple effect on penultimate sellers or other segments of the economy as well, but the intent of the Trade Relief Directions seems limited to the direct exporters only.

Which all regulated entities are covered?

The Directions are applicable to following entities:

  • Commercial Banks
  • Primary (Urban) Co-operative Banks, State Co-operative Banks and Central Co-operative Banks
  • NBFCs
  • HFCs
  • All-India Financial Institutions
  • Credit Information Companies (only with reference to paragraph 16 of these Directions).

Does it matter whether the RE in question is giving export credit facilities or not? In our view, it does not matter. The intent of the Directions is to mitigate the impact of trade disruptions. Of course, the borrower in question must be an exporter, must have an export credit facility outstanding as on 31st Aug 2025, and the same must be standard.

If these conditions are met, then the RE which holds the export credit, as also other REs (of course, the nexus between the trade disruption and the servicing of the credit facility will have to be seen) should consider the borrower for the purpose of grant of relief.

Relief may or may not be granted. 

Policy on granting relief

The consideration of the grant of relief will be based on a policy. 

Below are some of the brief pointers to be incorporated in the policy: 

  1. Purpose and Scope: define which loan products, sectors, or borrower categories are covered; effective period for granting relief
  2. Eligibility Criteria for borrowers
  3. Assessment criteria for relief requests received from the borrowers
  4. Authority responsible for approving such request
  5. Relief measures that can be offered to borrowers
  6. Impact on asset classification and provisioning
  7. Disclosure Requirements
  8. Monitoring and Review: Authority which is responsible for monitoring such accounts; periodicity of review

How is the assessment of eligible borrowers to be done?

In our view, the relevant information to be obtained from the candidates should be:

  • Total export over a relevant period in the past, say 3 years
  • Break up of export of “impacted items” and other item
  • Of the above, exports to the USA
  • Gross profit margin
  • Impact on the cashflows
  • Information about cancellation of export orders from US importers
  • Any damages or other payments receivable from such importers
  • Any damages or other payments to be made to the penultimate suppliers
  • Alternative business strategies – repositioning of markets, alternative buyer base, etc
  • Cashflow forecasts, and how the borrower proposes to pay after the Moratorium Period.

What sort of lending facilities are covered?

Please note the following from the preamble: “mitigating the burden of debt servicing brought about by trade disruptions caused by global headwinds and to ensure the continuity of viable businesses”. Therefore, clearly, the relief intended here is one where “trade disruptions” create such a burden on debt servicing, which may impact the viability of the business.

From this, it implies that the entity in question must be a business entity, and the loan in question should be a business loan. 

In our thinking, the following facilities seem covered:

  1. Export credits of all forms, including packing credit, funded as well as unfunded, letters of credit, etc.
  2. Buyer’s credit or facilities for inward acquisitions/purchases by an exporter
  3. Cash credits, overdrafts or working capital related facilities, intended for export business of impacted items.
  4. Term loans relating to an impacted business
  5. Loans against property, where the end use is working capital

Eligible and ineligible borrowers:

Eligible borrowers:

  • Borrowers who have availed credit for export
  • Borrower had an outstanding export credit facility from a RE as of August 31, 2025 (However, in case the borrower has a sanctioned facility pending disbursement as on Aug 31, the same shall not be eligible)
  • Borrower with all REs was/were classified as ‘Standard’ as on August 31, 2025

In our view, the following borrowers/ credit facilities are not eligible for the relief:

  • Individuals or borrowers who have not borrowed for business purposes
  • Home loans or loans against specific assets or cashflows, where the debt servicing is unconnected with the cash flows from an export business
  • Loans against securities or against any other financial assets
  • Gold loans, other than those acquired for business purposes
  • Car loans, loans against commercial vehicles or construction equipment, unless the borrower is engaged in export business and the cashflows have a nexus with such business
  • Borrower is engaged in exports relating to any of the sectors specified
  • Borrower accounts which were restructured before August 31, 2025
  • Accounts which are classified as NPA as on August 31, 2025

Consider a borrower who is not an exporter himself, but an ancillary supplier, supplying to a trading house. Will such a penultimate exporter be covered by the Relief Directions? In our view, the answer is negative, as the “eligible borrowers” are defined to mean an exporter.

Impacted items and impacted markets

The list of impacted items broadly covers a wide spectrum of manufacturing and export-oriented sectors, including marine products, chemicals, plastics, rubber, leather goods, textiles and apparel, footwear, stone and mineral-based articles, jewellery and precious metals, metal products, machinery, electrical and electronic equipment, automobiles and auto components, medical and precision instruments, and furniture and furnishing items.

Is it mandatory that the borrower shall be exporting to USA? While the Directions do not specifically mandate that the borrower shall be exporting to the USA, the concerned REs should, as part of their assessment, evaluate whether the borrower genuinely requires such relief measures and, in our view, should consider the extent to which the borrower depends on exports of the specified items to the USA.

Why have HFCs been covered?

Generally speaking, the servicing of home loans is not supposed to be based on business cashflows, and therefore, the impact of trade disruptions on servicing of a home loan does not seem easy to establish.

However, HFCs grant other credit facilities too, including LAP or business loans. Therefore, there is no carve out for HFCs as such. HFCs are also expected to prepare the policy referred to above and be sensitive to requests from impacted borrowers.

Is the moratorium retrospective?

Yes, clearly, the moratorium is retrospective, as it covers the period from 1st September to 31st December. This is the range over which the moratorium may be granted; of course, the decision as to how much moratorium, within the above maximum range, is warranted in the particular case, is that of the lender. Let us call the agreed moratorium as the Moratorium Period.

If the moratorium is granted from 1st Sept., then any payments which were due for the period covered by the Moratorium Period will  not be taken as having fallen due. This will have significant impact on the loan management systems:

  • Considering that we are already in the middle of November, the day count for any payments due during the part of the Moratorium Period will be set to zero. In other words, day count will stop during the Moratorium Period. Thus, if an account was showing a DPD status of 60 days as on Aug 31, 2025, the DPD count will remain at a standstill till the moratorium period is over.
  • However, in case a borrower has made payment during the moratorium period, will the DPD count decrease or will it remain the same? 

The RBI Directions state that the days past due (DPD) count during the moratorium period will be excluded. However, this does not imply that a borrower who makes payments during this period should be denied the corresponding benefit. In our view, if a payment is received from the borrower, the DPD count should accordingly be reduced.

  • Any payments already made during the part of the Moratorium Period already elapsed may be taken towards principal, or may be held to be adjusted against the future dues of the borrower, after the Moratorium Period. This should also, appropriately, be captured in the policy.
  • Further, for accounts for which the CIC reporting has already been done on or after Aug 31, 2025, and the lender decides to extend the moratorium benefit, it must be ensured that the DPD count is revised so as to reflect the status as on Aug 31, 2025. 

Do lenders have to necessarily grant moratorium, or grant partial interest/principal relief?

The RBI Directions do not mandate REs from granting such relief measures. Accordingly, the concerned RE will need to assess individual cases based on the sectors, the need for such relief and the extent to which such relief may be granted. 

Lenders may grant full moratorium during the Moratorium Period, or may grant relief as may be considered appropriate.

Do lenders take positive actions, or simply respond to borrower requests?

The lenders must establish a policy for granting such relief measures prior to extending any relief, as the authority to do so will be derived from this policy. As discussed above, the discretion to grant relief rests with the concerned RE; therefore, each request submitted by a borrower must be evaluated on an individual basis.

For this purpose, the following information must be obtained from the borrowers seeking relief:

  1. The concerned sector and how the same has been impacted necessitating such relief
  2. Information relating to the current financial condition of the business of the borrower
  3. Facilities taken and outstanding with other REs 

Non-compounding of interest during the Moratorium Period:

Para 9 (iii) provides that while interest will accrue during the Moratorium Period, but the interest shall be simple, that is, shall not be compounded.

This may require REs to tweak their loan management systems to stop the compounding of interest during the Moratorium Period. 

However, the actual population of affected borrowers for a particular RE may be quite limited. Hence, REs may do manual or spreadsheet-based adjustments for affected borrowers, instead of making adjustments to their LMS itself.

Recomputation of facility cashflows after Moratorium:

During the moratorium period, as per the RBI directive, the lender can only accrue simple interest. Accordingly, the IRR of the credit facility will have a negative impact unlike the covid moratorium where the compound interest loss was compensated by the central government. 

Further, it has also been provided that the accrued interest may be converted into a new term loan which shall however be repayable in one or more installments after March 31, 2026, but not later than September 30, 2026. Accordingly, the accrued interest should anyhow be received by September 30, 2026.

Similar moratoriums in the past

  • Moratorium on loans due to COVID-19 disruption: Refer to our write-up here.
  • Moratorium 2.0 on term loans and working capital: Refer to our write-up here.

Our write-ups on similar topics:

Social spending for social companies: The paradox of CSR spend for not-for-profit companies

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Ankit Singh Mehar, Assistant Manager | corplaw@vinodkothari.com

Statutory provisions for mandatory CSR spending envisage that companies go out of their business models, and “give back to the society” at least to the extent of 2% of their net profits. The underlying principle is that before the profits are distributed to the stakeholders, companies should contribute a minimal amount on social engagement. However, how do we relate this requirement to a company which does not exist for profit-making? How do we relate it to a company which cannot distribute even one penny, in whatever form, to its shareholders? Or all the more importantly, how do we relate this to a company whose business model itself is for some social good? It is formed for, and exists for social good, and that is what it does. So how does the company spend that 2% on social good, if that is what the company does with all that it earns?

We are talking about section 8 companies, which are commonly referred to non-profit organizations (NPOs), or not-for-profit (NFP) companies. A lot of NPOs exist in non-corporate form – e.g. trusts, where the question of applying sec 8 of the Companies Act, 2013 (‘‘Act’’) will not arise. However, there is an increasing number of NPOs registering as sec 8 companies. As on October, 2024[1][2], there are 52000+ companies registered as sec 8 companies in India, of which nearly 40,000+ companies are registered on Darpan Portal.[3] These companies may not exist for profits, but of course, they may make profits. If they make profits, the question of applicability of sec. 135 of the Act comes – whether a 2% of the average profits needs to go “outside the business model” into activities that are listed in Schedule VII.

Before we delve any further, it is important to note that not every company licensed u/s 8 is engaged in activities listed in Schedule VII. To cite examples: a sec 8 co may be running a hospital or educational institution which serves the higher segments of the population pyramid. A sec 8 co may be running a microfinance business or be running as an industry association such as Association of Mutual Funds in India (AMFI) or Association of Registered Investment Advisers (ARIA). The key feature of a sec 8 is the bar on distribution of profits, whereas Schedule VII has a list of activities which are treated as CSR-eligible.

So, the questions that we are trying to answer in this write up are:

  • Will a company, whose business model is to carry the activities listed in Schedule VII, for the masses and social good, have to spend 2% of the profits on CSR over and above their routine spending?
  • Will a company, whose business model is to carry the activities listed in Schedule VII, but not for masses or BoP (base of pyramid) segment, have to spend 2% of the profits on CSR?
  • Will a company, whose business model is to not engage in activities listed in Schedule VII, have to spend 2% of the profits on CSR?
  • In either case, even if there is no spending requirement, will the company have to do procedural compliance, viz., a CSR Committee, to examine the obligations of the company from a large social perspective, and give a report to the Board whether the company at all needs to go beyond its domain and spend on a larger social good?

Fitting into the ‘frame of CSR’ – the paradox!

A company required to spend on CSR is inter-alia required to ensure two things while selecting for an activity / project to be undertaken:

  1. The activity / project proposed to be undertaken should be covered under the Schedule VII of the Act; and
  2. The activity / project proposed to be undertaken should satisfy the condition set out under rule 2(1)(d) of CSR Rules[4].

Rule 2(1)(d) of CSR Rules inter-alia states that an activity undertaken in pursuance of normal course of business of the company cannot be undertaken as a CSR activity / project. Now, for a section 8 company which undertakes activities covered under Schedule VII of the Act in its normal course of business, complying with section 135 would become an impossibility. On one hand, such a company is obligated to spend 2% of its net profits on Schedule VII activities. On the other hand, if the company does so, one may also contend that such activity is in its normal course of business which is prohibited under the regulatory framework for CSR.

Further, Section 8 companies can also act as an ‘implementing agency’ for the companies covered u/s 135(1) of the Act. An implementing agency essentially undertakes CSR activities / Schedule VII activities on behalf of a company. Therefore, even for a section 8 company acting as an implementing agency, it is engaged in Schedule VII activities in its normal course and being as such it is likely to receive restricted funds specifically provided for implementing CSR projects. Accordingly, if a sec. 8 company undertakes any Schedule VII activity to fulfil its own CSR obligation, it may, in effect, be pursuing an activity that forms part of its normal course of business, thereby conflicting with the prohibition under the CSR regulatory framework.

Another interesting situation to be noted is a case where a sec 8 company being an implementing agency or a beneficiary receives restricted funds which could not be entirely spent in a particular financial year due to a number of reasons, say, disbursement by a company just before conclusion of the financial year. In such a case, it will be absolutely illogical to consider the increase in the net profit of the company to the extent attributable to unutilized restricted funds. The reasoning is simple – when the company does not have the discretion to use these funds freely and they are earmarked for a specific purpose, considering such amounts as income and hence, part of profits for the company in the context of CSR applicability or spending should be incorrect.

Now, coming back to the issue, even if one takes the view that such section 8 company may undertake, as a CSR activity / project, any Schedule VII activity other than those it already undertakes in its normal course of business, this contention would be counterintuitive, as it would essentially create no distinction between the activities such section 8 company is already undertaking and the ones it would otherwise be required to pursue.

Regulator’s take on the issue

The position discussed in the Report of the Companies Law Committee[5] is as follows:

XXX

The High level CSR Committee had recommended for Section 8 companies to be exempted from the provisions on CSR. It had been noted by the said Committee that “Section 8 companies are ‘not for profit’ companies registered under Section 8 of the Companies Act, 2013 (Section 25 of Companies Act, 1956) with the basic object of working in social and developmental sector. Their involvement in charitable and philanthropic activities is already 100 percent. These companies prepare income and expenditure statements which reflect the surplus/deficit of an organization and not the profit of the company. The surplus accrued to such company is not distributed amongst members, but is ploughed back to the expenditure of the company, that in turn is spent on social welfare activities already included in Schedule VII. Therefore, it may be not necessary for these companies to undertake CSR activities outside the ambit of their normal course of business.” The Committee, however, felt that it would not be appropriate to give differential treatment to section 8 companies in the matter of providing exemptions from compliance of CSR provisions, as there are certain areas where examples could be found of section 8 and other companies co-existing, for example, companies in microfinance business. Further, there should not be a difficulty in section 8 companies using the prescribed percentage of its surplus for CSR activities. Thus, it was decided not to recommend for exemption of Section 8 companies from the CSR provisions of the Act.

XXX

The recommendations of the High Level CSR Committee (’HLC’) were not accepted and no exemption was conferred upon section 8 companies from the CSR provisions. However, the views of the HLC are still relevant for a section 8 company which is otherwise engaged in Schedule VII activities in its normal course of business. Their contribution towards CSR activities is 100 percent (far beyond the regulatory threshold of 2% of networth). Therefore, requiring them to comply with the CSR provisions seems to be quite quixotic.

Worthwhile to note that even the FAQ of ICSI on section 8 company states that a section 8 Company would not be considered as compliant with CSR provision if it contributes the CSR amounts towards its own activities which may be charitable in nature and in line with the CSR approved.

7.2 Is Section 8 Company compliant if it contributes the CSR amounts towards its own activities which may be charitable in nature and in line with the CSR approved areas of spent?

No, spending by the company in its own activities will not qualify as CSR spend. The amount needs to be spend on activities other than normal activities of the company and not for the benefit of the company or its employees.

Seemingly, the FAQ confirms, to some extent, the paradox discussed above. However, we humbly hold a different view for the reasons discussed below.

What looks like a sensible interpretation?

1.     For sec 8 companies carrying on CSR like activities and reaching masses

To take a view on the subject matter, one may look into the basic intent of the CSR provisions. The idea behind CSR is to ensure that besides the business motive, companies should be doing ‘social spending’ so that it gives back to the society from where it is earning its bread and butter. In other words, the idea is that besides distributing the profits to the shareholders, a company is also expected to undertake certain activities for the welfare of the society by taking out certain portions of its profits. A section 8 company engaged in Schedule VII activities in its normal course of business is already fully engaged in social development and contributes significantly towards social causes. More so, their entire profits are applied towards social activities only. In this way, one can logically conclude that such a section 8 company is already compliant with the true spirit of CSR.

Therefore, for a section 8 company discussed above which is covered u/s 135(1) of the Act, the sensible interpretation would be to ignore the stipulation mentioned under rule 2(1)(d)(i) of CSR Rules which states that ‘activities undertaken in pursuance of normal course of business of the company’ are not in the nature of eligible CSR activities. To contend otherwise would be to fall squarely into the paradox discussed above. Accordingly, in our view, while all the other requirements envisaged in CSR provisions including constitution of CSR committee, formulating a CSR policy, preparing a CSR report etc., would require to be complied by a section 8 company, it may consider not to undertake a separate CSR activity/ project and spent 2% of its net profit thereon since the activities undertaken by its are eligible CSR activities itself. In this regard, the committee or similar body in a section 8 company should take note of such a situation and explicitly take note of the fact that since it is already pursuing CSR activities by the nature of activities, it need not spend funds additionally for some other project thereby putting its existing projects at stake.

Accordingly, in this case, the compliances that would be required to be observed in this case would be as follows:

  1. Constitution of CSR committee
  2. Formulating a CSR policy (wherein the said policy should include a reference of this interpretation in the context of mandatory CSR spending) and making the same available on the website of the company;
  3. Approval of the minimum budget and Annual Action Plan (here the AAP would refer to include those spending areas for the specific year which are to be considered for this obligation);
  4. Monitoring of the specific part of the spending that is considered to be made as a part of CSR spending; and
  5. CSR Reporting i.e. providing CSR report in the Board’s report and filing of form CSR-2.

For example: say a company is spending INR 15 lacs across three projects (Project 1: Healthcare – 10 lacs, Project 2: Education – 4 lacs and Project 3: Sports – 1 lac). Suppose the CSR obligation of the company comes to INR 1 lac. Now, for the purpose of compliance, the company may consider the expenditure towards Project 3 as its CSR expenditures. Accordingly, the following shall also ensue:

  1. The AAP shall contain details about Project 3 in manner set out in rule 5 of CSR Rules
  2. The spending on Project 3 shall also be reported in the CSR report forming part of the board’s report and form CSR-2.
  3. The CSR committee shall be required to monitor the progress of Project 3 on a periodic basis.

2.     For sec 8 companies either not carrying out CSR like activities or those serving the privileged segment of society

Unlike the views shared above, the same cannot be applied in cases where the sec 8 company is not serving the BoP segment of the society. For such entities, the intent is not to serve or reach out to the masses but to serve the privileged segment of the society. In doing so, the cost for the services offered is so high that a normal public cannot afford and therefore, even though the nature of service is that of a social good, it is limited to the privileged section of the society. In such cases, if the sec 8 company falls under the ambit of mandatory CSR spending, it needs to go out of its normal course of business and actually carry out CSR activities based on its CSR policy and comply with all other requirements as would have been made applicable to any other non-sec 8 company covered under section 135 of the Act. On the other hand, for sec 8 companies not pursuing CSR like activities (as in those falling under Sc VII), there also the need to comply with the CSR spending and other related provisions will be made applicable.

Read our other resource material on CSR here

[1] https://sansad.in/getFile/loksabhaquestions/annex/183/AU5_HFf4SO.pdf?source=pqals&utm

[2] https://cag.gov.in/webroot/uploads/download_audit_report/2021/Report%20No.%2016%20of%202021_E%26SM_English_PDF%20A-061c1b9cbe2d147.22751655.pdf?utm#page=34

[3] https://ngodarpan.gov.in/#/

[4] means Companies (Corporate Social Responsibility Policy) Rules, 2014

[5] https://prsindia.org/files/bills_acts/bills_parliament/2016/Report_of_the_Companies_Law_Committee_3.pdf#page=47

Disclosure of ESG ratings – automated or still needs manual disclosure?

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Ankit Singh Mehar, Assistant Manager | corplaw@vinodkothari.com

Background

Pursuant to the recommendations of the Expert Committee and as discussed in the SEBI Board meeting held on Sep 30, 2024 and outlined in SEBI Circular dated December 31, 2024, stock exchanges (‘SEs) were mandated to specify the process and timelines for system-driven disclosure (‘SDD’) for any new ratings or revision in ratings. Pursuant to this, NSE and BSE issued their respective circulars specifying the procedural requirements with respect to system-driven disclosures for the ratings (‘SDD Circulars’) on August 1, 2025.

The receipt and/ or change in ESG ratings is a disclosable event in terms of Regulation 30 of the Listing Regulations read with clause (3) of Sch. III.A.A thereof. Hence, a question arises on whether or not the same is also covered by the SDD Circulars, or whether a manual disclosure is still required on receipt/ change of ESG ratings.

What is an ESG rating?

ESG rating is defined under Reg 28B(1)(b) of SEBI (Credit Rating Agencies) Regulations, 1999. To put it simply, an ESG rating is essentially an opinion about (a) either an ‘issuer’ or (b) a security. The ESG ratings provide an opinion on the ESG profile or characteristics, and may either refer to the ESG risks faced by the entity or the impact it may have on the environment and the society, or both.

As per SEBI’s framework for ESG rating provider, an ESG rating provider (‘ERP’) uses either of the below-mentioned models:

  1. Subscriber-pays model – wherein ratings are solicited by the subscribers that may include banks, insurance companies, pension funds, or the rated entity itself. 
  2. Issuer-pays – wherein the ratings are solicited by the rated entity, in terms of a written contractual agreement between such entity and the rating provider.

Disclosure requirement under Reg 30 of Listing Regulations

Any receipt of rating or revision in existing ESG rating is a ‘deemed material event’ and covered under clause (3) of Sch. III.A.A of Listing Regulations. Since the event emanates from outside the listed entity, such event is required to be disclosed to the SEs within 24 hours of such receipt / information.

Here, the following needs to be noted w.r.t. the disclosure requirements under Reg 30:

  • Ratings received under both subscriber-pays and issuer-pays model (solicited as well as unsolicited) are required to be disclosed.
  • Both upward and downward revision in ratings is required to be informed.
  • Withdrawal of an existing rating is required to be disclosed
  • Re-affirmation of an existing rating is required to be disclosed as well.

Automation of ESG rating disclosure

The SDD Circulars referred above, are applicable to both credit ratings and ESG ratings. Pursuant to the same, the ERPs are required to report the ESG ratings provided by them to the SEs. The manner of reporting by ERPs has also been provided in the SDD Circular itself. Once reported to the SEs, the ESG rating shall be automatically reflected on the website of the BSE and NSE.

Therefore, since SEs will get the ratings from the ERPs itself, both solicited and unsolicited ratings will be disclosed on the SE platform.

When does this SDD come into effect?

In terms of SDD Circulars, the disclosure of credit and ESG rating has become effective from August 2, 2025.

Actionable for the LEs?

Since the ESG rating shall be consumed by the SEs from the ERPs and auto disseminated on the website, there is no actionable for the LEs in relation to the disclosure of ESG rating under reg 30. However, LEs should monitor whether the ratings provided to them are reflected on SEs. In case any rating is not reported by the ERP, the LE may proactively disclose the same at its end.

Refer our resources below:

Expected to bleed: ECL framework to cause ₹60,000 Cr. hole to Bank Profits

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Dayita Kanodia and Chirag Agarwal | finserv@vinodkothari.com

The proposed ECL framework marks a major regulatory shift for India’s banking sector; it is long overdue, and therefore, there is no case that the RBI should have deferred it further. However, it comes coupled with regulatory floors for provisions, which would cause a major increase in provisioning requirements over the present requirements. Our assessment, on a very conservative basis, is that the first hit to Bank P/Ls will be at least Rs 60000 crores in the aggregate. 

RBI came up with a draft framework on ECL pursuant to the Statement on Developmental and Regulatory Policies, wherein it indicated its intention to replace the extant framework based on incurred loss with an ECL approach. The highlights can be accessed here.

A major impact that the draft directions will have on the Banking sector is the need to maintain increased provisioning pursuant to a shift from an incurred loss framework to the ECL framework. Under the existing framework, banks make provisions only after a loss has been incurred, i.e., when loans actually turn non-performing. The proposed ECL model, however, requires banks to anticipate potential credit losses and set aside provisions for such anticipated losses. 

Banks presently classify an asset as SMA1 when it hits 30 DPD, and SMA2 when it turns 60. Both these, however, are standard assets, which currently call for 0.4% provision. Under ECL norms, both these will be treated as Stage 2 assets, which calls for a lifetime probability of loss, with a regulatory floor of 5%. Thus, the differential provision here becomes 4.6%.

Once an asset turns NPA, the present regulatory requirement is a 15% provision; the ECL framework puts these assets under Stage 3, where the regulatory minimum provision, depending on the collateral and ageing, may range from 25% to 100%. Our Table below gives more granular comparison.

Type of assetAsset classificationExisting requirement Proposed requirementDifference
Farm Credit, Loan to Small and Micro EnterprisesSMA 00.25%0.25%–
SMA 10.25%5%4.75%
SMA 20.25%5%4.75%
NPA15%25%-100% based on Vintage10%-85% based on Vintage
Commercial real estate loansSMA 01%Construction Phase -1.25%

Operational Phase – 1%		Construction Phase -0.25%

Operational Phase – Nil
SMA 11%Construction Phase -1.8125%

Operational Phase – 1.5625%		Construction Phase -0.8125%

Operational Phase – 0.5625%
SMA 21%Construction Phase -1.8125%

Operational Phase – 1.5625%		Construction Phase -0.8125%

Operational Phase – 0.5625%
NPA15%25%-100% based on Vintage10%-85% based on Vintage
Secured retail loans, Corporate Loan, Loan to Medium EnterprisesSMA 00.4%0.4%–
SMA 10.4%5%4.6%
SMA 20.4%5%4.6%
NPA15%25%-100% based on Vintage10%-85% based on Vintage
Home LoansSMA 00.25%0.40%0.15%
SMA 10.25%1.5%1.25%
SMA 20.25%1.5%1.25%
NPA15%10%-100% based on Vintage(-)5% – 85% based on Vintage
LAPSMA 00.4%0.4%–
SMA 10.4%1.5%1.1%
SMA 20.4%1.5%1.1%
NPA15%10%-100% based on Vintage (-)5% – 85% based on Vintage
Unsecured Retail loanSMA 00.4%1%0.6%
SMA 10.4%5%4.6%
SMA 20.4%5%4.6%
NPA25%25%-100% based on Vintage0%-75% based on Vintage

The actual impact of such additional provisioning will be a hit of more than 3% to the profit of banks1. Based on the RBI Financial Stability Report of FY 24-252, the current level of SMA and NPA is estimated to be ₹3,78,000 crores (2%) and ₹4,28,000 crores (2.3%), respectively. 


Accordingly, an additional provision of approximately₹ 18,000 crores (4.6% of SMA volume) and ₹ 42,000 crores (10% of NPA volume) will be required for SMA and NPA respectively, leading to a total impact of at least ₹60,000 crores. This estimate has been arrived at by considering the % of NPAs and SMA-1 & SMA-2 portfolios of banks. The actual impact may be higher, as lot of loans may be unsecured, and may have ageing exceeding 1 year, in which case the differential provision may be higher.

It may be noted that while the draft directions allow Banks to add back the excess ECL provisioning to the CET 1 capital, it does not neutralize the immediate profitability impact, as the additional provisions would still flow through the profit and loss account.

How do we expect banks to smoothen this hit that may affect the FY 27-28 P/L statements? We hold the view that it will be prudent for banks, who have system capabilities, to estimate their ECL differential, and create an additional provision in FY 25-26, or do technical write-offs.

Other Resources

  1. The total Net profit of SCBs is ₹ 23.50 Lakh Crore for FY 24. (https://ddnews.gov.in/en/indian-scbs-post-record-net-profit-of-%E2%82%B923-50-lakh-crore-in-fy24-reduce-npas/ )
    ↩︎
  2.  Based on our rough estimate of the data available here: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1300 ↩︎