IFRS9


IFRS 9 : Estimation Of Expected Credit Loss For Financial Assets In The Banks Under IFRS 9, the expected credit loss (ECL) is used to estimate the risk of loss due to a borrower's failure to repay a loan or meet contractual obligations. It is directly linked to credit risk, which is the possibility of a loss resulting from a borrower's inability to repay a loan or meet credit obligations. 🟦 Formula For Calculation of ECL The ECL is calculated by multiplying the PD, LGD, and EAD, adjusted by the discount factor for the present value of the expected loss. ECL = PD% *LGD% *EAD *DF% 🟦 Components Of ECL ECL calculation involves 4 key components: ▪️ Exposure at Default (EAD) ▪️ Probability Of Default (PD) ▪️ Loss Given Default (LGD) ▪️ Discount Factor (DF) This approach helps in provisioning for potential losses, ensuring that lenders maintain adequate capital reserves to cover credit risks. 1️⃣ Exposure At Default EAD estimates the total amount at risk at the time of default, reflecting the outstanding loan balance or credit exposure. EAD = Current Balance + Undrawn Commitments EAD measures the total exposure at the point of default. It includes all credit lines available to the borrower, not just the current balance. 2️⃣ Probability Of Default PD = Historical Default Rate or Scorecard Output PD is the likelihood that the borrower will default over a specific time period (e.g., one year). This can be estimated based on historical data or through statistical models. 3️⃣ Loss Given Default LGD = (1 - Recovery Rate) * 100% LGD represents the percentage of the EAD that is expected to be lost if a default occurs. Recovery rates can be estimated from past recoveries or industry data. LGD is measured through a combination of historical data analysis, recovery rates, and market conditions, among other factors. 4️⃣ Discount Factor DF = 1 / (1 + Discount Rate)^t The discount factor is used to present value the future cash flows (losses) back to the reporting date. 't' represents the time in years until the cash flow occurs.


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