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I am starting a series of blogs on IFRS9 'Expected Loss Provisioning'. In the next few days I will discuss how to model Expected Loss as per New accounting norms. I will be using Simple Excel spreadsheets for discussions. If anyone has any questions, feel free to contact at +91-9780564549

Question 1:

Why Expected Loss Provisions are required - 

1. Pricing (Int. rates) is biased, int. rates are biased and driven by strategic concerns 

2. Earlier RBI Provisions - Prescriptive guidelines for identification + provisioning  New Expected Loss Provisions - Currently Impaired + Credit that may impair in future 

3.

Question 2:

For which Instruments are provisions required 

Provisions are not applicable to Financial assets measured at FVTPL

FVTPL - No ECL because losses are already going in PnL 

Not FVTPL - ECL

Question 3: 

How to calculate Provisions?

 Step 1: Check whether ECL provisioning applies to the Co. & Instrument or not? Doubt Companies Companies on whom Ind AS applies - Have to do ECL Provisioning eg. Bank following Standardized approach + Ind AS applicable  Companies adopted IRB approach - Have to do ECL Provisioning whether Ind AS followed or not   Why ? To Compare Provisions already held vs Estimated ECL Provisions Instruments  No FVTPL - ECL  

Step 2: Identify the approach with which ECL provisioning needs to be done eg for Banks & FI - General approach, for NBFC - Specific approach, For Trade & Contract receivables etc. 

Step 3: Define strict criteria for identifying an asset as Stage 1 or Stage 2 or Stage 3 because calculations of ECL depends on it.  What are these stages ?  

Why are these Stages important?  

Points to be Noted-  

 Step 4: Forecast Real World PD, Economic LGD & EAD

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