Impact of ECL on banking sector

The introduction of the Expected Credit Loss (ECL) framework under IFRS-9 has significantly reshaped credit risk management and financial reporting in the banking sector. Unlike the incurred-loss model, ECL require1s banks to recognise forward-looking credit losses, integrating probability of default, loss given default, exposure at default and macroeconomic forecasts. This shift has strengthened early risk identification but has also increased provisioning sensitivity to economic conditions.
One of the key impacts of ECL is on profitability and capital adequacy. Early recognition of credit losses leads to higher and more volatile provisions, particularly during periods of economic stress, directly affecting earnings and capital buffers. In Bangladesh, where corporate credit concentration and macroeconomic vulnerability are notable, ECL has intensified the need for prudent capital planning.
ECL has also influenced credit underwriting and portfolio discipline. Banks are now more cautious in borrower selection, internal rating accuracy and ongoing monitoring to prevent credit migration across stages. This has gradually improved asset quality and reinforced alignment between business growth and risk appetite.
From a supervisory perspective, ECL outcomes play a crucial role in Risk-Based Supervision (RBS) assessments by Bangladesh Bank. Overall, despite operational challenges, ECL has enhanced transparency, governance, and resilience across the banking sector.
Kawsik Azad Pronoy
A banker
Dhaka