Our client is one of India’s prominent private sector banks with a growing national footprint, offering specialized services across five key business sectors: Corporate Banking, Commercial Banking, Branch & Business Banking, Retail Assets, and Treasury & Financial Markets Operations. In line with Indian Accounting Standards (Ind AS), the client sought to establish a methodology for assessing expected credit losses. This method would involve calculating the probability-weighted estimate of credit losses throughout the expected lifespan of financial instruments. The primary goal is to quantify expected loss, distinguishing it from incurred losses.
Overview
Solution
- The three primary components i.e. Probability of default (PD), Loss given default (LGD) and Exposure at default (EAD) are derived based on empirical evidence, macro-economic factors and management judgement
- The ECL is calculated separately for all the portfolio segments as ECL= PD ∗LGD ∗EAD
- For calculating PD, flow rate approach is utilised fitting Weibull distribution to derive forecasted PDs
- LGD% are taken as discussed with subject matter expertise within the bank
- Approach for EAD reflects expected changes in the balance outstanding over the lifetime of the loan exposure
Output
- The bank was able to set aside an expense as provisions to meet the potential future loss due to credit risk
- Prompt loss recognition model, measured over a variety of data, helped the bank to reduce the procyclicality of bank lending
