RBI’s ECL Model: Your Credit Score Now Sets Loan Costs

From FY28, Indian banks will stop waiting for a default before setting aside money for bad loans. They will move to an expected credit loss (ECL) model. The change is meant to catch credit risk earlier. For borrowers, it means one thing: a dip in your credit score now carries a direct, immediate cost.

How ECL Changes Bank Provisioning

Today, banks use the incurred loss model. They provision only after a trigger event – a missed payment, a default. Problem is, defaults are outcomes of risk that builds up over months. By the time provisions are made, the damage is done. The RBI's ECL framework forces banks to act when risk rises, not when it materialises.

The core concept is SICR – significant increase in credit risk. The RBI’s directions list what counts as SICR: a credit rating downgrade, a deterioration in the borrower’s macroeconomic environment, a drop in collateral value, or any breach of contract that could lead to covenant revisions. A falling credit score qualifies.

Under ECL, every loan on a bank’s book falls into one of three stages.

Stage 1 covers loans with no SICR. Banks must provision based on the expected loss over the next 12 months. The regulatory floor is 0.4% of the outstanding amount – roughly in line with current standard-asset provisioning.

Stage 2 is the pivot. Loans that have experienced SICR – such as a borrower whose CIBIL score drops even though she is still paying – must be moved here. Provisions jump to lifetime expected loss, with a floor of 5% of outstanding. That is 12.5 times the Stage 1 floor. The RBI also says any account 30 days past due automatically becomes Stage 2 unless the bank can prove no SICR exists.

Stage 3 is for credit-impaired assets – non-performing loans overdue by 90 days or more, plus cases of financial distress or high insolvency risk even before 90 days. The provisioning floor rises to 25% of outstanding, from 15% under current rules.

Higher provisions eat into a bank’s capital. Banks respond by repricing risk. Loans linked to weaker credit scores get higher interest rates or outright rejection. A borrower with a score of 750 or above gets the best deals – 79% of all loans go to this group, according to CIBIL data. Scores between 650 and 749 face slightly higher rates. Below 650, approval becomes tough and pricing jumps.

The point is simple: a credit score drop can push your loan from Stage 1 to Stage 2 on the bank’s books. That triggers a 12.5x jump in provisioning. The bank passes on that cost.

Why a Credit Score Dip Now Costs More

Credit information companies (CICs) – TransUnion CIBIL, Equifax, Experian, and CRIF High Mark – calculate scores based on four factors: payment history, how much of your sanctioned credit you actually use (utilisation ratio), how long you have had credit, and how often you apply for new loans.

A few late payments push down payment history. Using more than 30% of your credit card limit raises utilisation. Applying for multiple loans in a short period increases your enquiry count. Any of these can knock your score. Under ECL, that knock becomes a signal to the bank to reclassify your loan and set aside more capital.

Borrowers with no credit history – “new to credit” or NTC – also get hit. Bank of India, for instance, charges 7.1% for a housing loan to an applicant with a credit score of 840 or above. An NTC applicant pays 7.9% – the same rate as someone with a score between 725 and 759. Starting early on a credit card, preferably secured against a fixed deposit, helps build a track record. Pay the full bill every month, not just the minimum due.

For existing borrowers, the fix is straightforward: pay EMIs on time, keep credit card utilisation under 30% of the limit, avoid frequent loan applications, and do not close old credit cards – longer history helps the score.

When debt piles up – after a layoff or business loss – consolidate multiple credit cards and personal loans into a single loan. Convert unsecured debt into secured loans like jewel loans if possible. Keep total EMIs below 30% of monthly income. Monitor your credit report every six months – each CIC offers one free report per year. Check for errors: a repaid loan showing as outstanding, an enquiry you never made. Raise a dispute with the CIC and follow up with the relevant bank. If unresolved, escalate to the RBI Ombudsman.

The RBI mandates full compliance with ECL by April 2028. Borrowers have two years to clean up their credit profiles. A score drift that would have cost nothing under the old model now carries real monthly cost.