Demystifying Expected Credit Loss (ECL) | KPMG | IN

Demystifying Expected Credit Loss (ECL)

Demystifying Expected Credit Loss (ECL)

The adoption of the ECL model is of great significance in the Indian context, considering the NPA situation in the banking sector, as the ECL model would require banks to start provisioning for expected credit losses from the time when the loan is originated rather than based on trigger events when the loss is imminent or the current rule based provisioning norms.

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Expected credit loss

The adoption of the ECL model is of great significance in the Indian context, considering the NPA situation in the banking sector, as the ECL model would require banks to start provisioning for expected credit losses from the time when the loan is originated rather than based on trigger events when the loss is imminent or the current rule based provisioning norms. Through this report, we aim to demystify the requirements of provisioning using the ECL model under the new Indian Accounting Standards (Ind AS) that are converged with International Financial Reporting Standards (IFRS). This report has been developed based on our implementation experience across Indian, Middle East and South East Asian Banks with regional and global presence.

Reserve Bank of India (RBI) has announced the roadmap for adoption of Ind AS from April 2018. The Ind AS on Financial Instruments: Ind AS 109 (similar to IFRS 9) significantly impacts financial services organisations as it introduces the requirement to compute and provide for expected credit losses on all financial assets and is set to replace the current rule based provisioning norms as prescribed by the RBI. This report will help various stakeholders to adopt a sound and market proven methodology to compute the expected credit losses.

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