Learn / Playbooks / Provisioning and ECL

Provisioning and ECL

Quarter-end is close. Finance needs the expected credit loss number, and the auditors will question it. Stage the book, estimate PD, LGD and EAD, and defend the number.

11 steps · 13 tools (3 free) · for risk analysts at banks and NBFCs

Tools you will use

This playbook is free to read. The prompt for each step is inside its tool. See the Pro tools.

Schema profile builderFree

Definition libraryFree

DPD and bucket computationFree

Provisioning under current normsNPA, SMA and provisioning

ECL stagingECL and Ind AS 109

PD estimation for ECLECL and Ind AS 109

LGD estimationECL and Ind AS 109

EAD and credit conversionECL and Ind AS 109

Macro scenarios and forward-looking overlaysECL and Ind AS 109

ECL computation pipelineECL and Ind AS 109

ECL back-testing and documentationECL and Ind AS 109

Calibration testsModel validation

MIS reconciliation to financePortfolio MIS and growth

Check these first

Each tool asks the same questions and gives you a prompt to build whatever is missing.

Loan tape with DPD for each account and month?

Have itAlready calculatedDon't have it

Recovery and write-off history by account?

Have itDon't have it

Macro scenarios approved by management?

YesNo

The steps, in order

Each step names the tool to open.

Set up

Tell the tools your table names

Loan tape, recoveries and macro data.

FreeSchema profile builderFreeDefinition library

Days past due and buckets

The base for staging.

FreeDPD and bucket computation

Classify

Provisioning under current norms

What the regulatory rules require.

Provisioning under current norms

ECL staging

Stage 1, 2 and 3 rules and migrations.

ECL staging

Estimate

PD estimation

Probability of default by stage and segment.

PD estimation for ECL

LGD estimation

What you lose when default happens.

LGD estimation

EAD and credit conversion

Exposure at default, including undrawn limits.

EAD and credit conversion

Macro scenarios

Forward-looking adjustments.

Macro scenarios and forward-looking overlays

Compute and defend

ECL computation pipeline

PD x LGD x EAD, repeatable every quarter.

ECL computation pipeline

Back-test and document

Compare past estimates with what happened.

ECL back-testing and documentationCalibration tests

Reconcile to finance

The ECL balance must tie to the books.

MIS reconciliation to finance

Check before you send

Stage totals add up to the total book.
PD, LGD and EAD are each tested against past outcomes.
Management overlays are written down with reasons.
Changes since last quarter are explained, with the effect of each.

Warning signs

ECL falls while stage 2 rises: check the staging rules before celebrating.

LGD is based on very few recoveries: widen the data or flag the uncertainty.

What you hand over

An ECL computation with stage tables, assumptions, back-test results and a reconciliation to finance.

In your profile

Once you are signed in, your profile shows which steps you can run with the tools you own, and which tools you still need.

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