A major change in India’s banking sector is set to reshape the way loans are approved from April 2027. Under the RBI’s upcoming Expected Credit Loss (ECL) framework, banks will be required to provide for potential losses much earlier than under the current system. Industry experts say the move could make home, auto and education loans harder to obtain for customers with weaker credit profiles.

Borrowers with CIBIL scores below 730 are expected to face the biggest impact. Banks may either become more cautious in extending credit or compensate for higher risks by charging increased interest rates and seeking additional collateral. According to industry estimates, nearly 62% of loan applicants in the country have credit scores below 730, meaning a large section of borrowers could find financing more expensive or difficult after the new norms take effect.

The Reserve Bank of India’s ‘ECL Direction-2026’ will come into force on April 1, 2027. Unlike the current practice, where banks make provisions after a loan turns into a non-performing asset, the new framework requires lenders to anticipate possible future defaults and maintain funds in advance. Banking experts estimate that the transition could reduce sector-wide profits by nearly ₹42,000 crore because of higher provisioning requirements.

According to Damodaran C, Chief Risk Officer at Federal Bank, customers who pose greater lending risks are likely to face higher borrowing costs under the new regime. Borrowers with stronger credit histories, meanwhile, may enjoy better terms and greater flexibility.

Shift Towards Premium Borrowers

Banks are expected to place increased emphasis on customers with strong repayment records and credit scores above 730. Industry estimates suggest that around seven crore borrowers fall into this category. Lenders are likely to prioritize these customers while strengthening risk monitoring and recovery mechanisms.

The new framework will also encourage banks to assess multiple factors while evaluating future defaults. Apart from repayment history and changes in CIBIL scores, institutions may examine income trends, employment stability and the loan-to-value ratio before approving loans.

Higher Provisioning Burden

The proposed rules significantly increase the amount banks must set aside when borrowers miss instalments. For example, on a home loan of ₹25 lakh, a 30-day default currently requires provisioning of around ₹10,000. Under the new norms, that amount will rise to ₹25,000. For defaults between 31 and 60 days, the provision requirement could increase from ₹10,000 to ₹1.25 lakh.

For accounts overdue beyond 90 days, banks currently set aside about 15% of the loan amount, or ₹3.75 lakh in the case of a ₹25 lakh loan. Under the ECL framework, this requirement would increase to ₹5 lakh, raising the cost of lending for banks.

Impact on Borrowers

Financial analysts believe the new rules are aimed at improving the stability of the banking system and identifying risks at an earlier stage. However, the changes could make access to retail loans more selective. Borrowers with lower credit scores may need to improve repayment discipline and maintain healthy credit profiles to secure favourable loan terms.

With the ECL Direction-2026 scheduled for implementation from April 1, 2027, banks are expected to gradually recalibrate lending strategies, placing greater emphasis on credit quality and risk management.