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BankingNABARD / RBI

Expected Credit Loss (ECL): Meaning, Steps and Users

8 February 20251 min read
BANKING & FINANCEExpected CreditLoss (ECL):Meaning, Stepsand Users8 February 2025safalsetu.com

What is ECL?

A probability-based method lenders and companies use to forecast losses if customers fail to pay.

Steps

StepMeaning
PDChance the borrower defaults
LGDLikely loss on default
EADAmount at risk at default
Portfolio ECLSum of loan-level ECLs

Why and who

  • Makes statements more reliable and helps banks keep enough provisions.
  • Companies: impairment of financial assets such as trade receivables.
  • Banks: provisioning on loan portfolios.

Exam angle

  • Components: PD, LGD, EAD.

Test yourself

1. In the Expected Credit Loss framework, PD stands for what?

PD is the estimated probability that the borrower defaults.

2. Expected Credit Loss is mainly used by banks to do what?

Banks use ECL to measure and provide for loan portfolio losses.

3. Companies use ECL for impairment accounting of which asset type, among others?

Trade receivables and other financial assets are covered by ECL.

This topic is part of Daily Current Affairs 8 February 2025 (12 topics).

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