Indian banks gear up for new effective interest rate accounting rules

what happened

Indian banks have begun preparing to test their software for the Reserve Bank of India's new accounting rules based on the effective interest rate (EIR), according to TradingView, which cites sources speaking to Moneycontrol. The industry is still discussing the change, and some participants want existing practices kept in place. SBI is leading the talks, and one bank plans to start user acceptance testing after Diwali so its systems are ready by January.

The RBI issued two sets of directions on April 27, and both take effect on April 1, 2027. Under EIR, interest income reflects premiums, discounts and transaction costs, not just the coupon rate. For eligible held-to-maturity securities and certain available-for-sale debt, fair value as of March 31, 2027 becomes the new gross carrying amount. The net difference, after taxes, will be offset against revenue or general reserves rather than passing through the profit and loss account.

Loans outstanding on March 31, 2027 may keep using the contractual rate during the transition, but must move to EIR by April 1, 2030. Loans originated from April 1, 2027 fall under EIR from the start.

why it matters

The shift comes alongside expected credit loss provisioning, which the RBI says should strengthen credit-risk management and make banks' reporting more comparable. The change to reported interest income and reserves will differ from bank to bank, depending on each lender's loan and investment mix.

market impact

Indian banks: the EIR switch changes how interest income and reserves are reported

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