A profit drag is coming for banks. What investors must know

Summary: A major change is coming to how banks deal with bad loans—one that could affect profits, valuations and the way investors look at banking stocks. The RBI’s new norms promise stronger safeguards, but not without short-term challenges. Here’s what’s changing and why it matters. The Reserve Bank of India (RBI) has released a draft proposal that could significantly change how banks recognise and provide for bad loans. These new rules are not final yet, but if implemented, they will reshape how banks report profits, manage risk and necessitate investors to change the way they analyse banking stocks. To put it simply: banks will need to start preparing for losses much earlier than they do today. Existing norms for loan provisioning At the moment, banks generally make large provisions only after a loan becomes a non-performing asset (NPA)—meaning the borrower has stopped paying for more than 90 days. Until that point, provisioning tends to be relatively small and varies from bank to bank based on internal policies. This means the current system is reactive. Banks wait for trouble to clearly surface before ab