India’s central bank has introduced tighter rules requiring banks to set aside more funds for future losses on credit and loan portfolios, in a move to align the sector’s norms with global standards.

Under the new norms, banks will be required to divide loans into three stages depending on future risk assessment on their portfolio, the Reserve Bank of India said in a statement. Moving to an expected credit loss framework, which the RBI had proposed in early 2023, would mean banks across the board will have to set aside more capital for potential loan losses, leading to lower profits.