Expected credit losses on loans: Guide for NBFCs
– Vinod Kothari | finserv@vinodkothari.com
One of the most important, and often the most complicated issues in applying IndAS 109 to financial assets, particularly loan portfolios, is to the computation of expected credit losses (ECL). The following points need to be noted about ECL computation:
- ECL is not relevant for assets which are subject to FVTPL. Hence, ECL computation is relevant for assets subject to amortised cost and FVOCI. This means, practically, all loan assets of NBFCs will be covered.
- ECL is not a provision – it is a loss allowance. Therefore, ECL is debited to P/L account.
- ECL is to be measured and re-measured every reporting period.
- ECL is a present value measure. Therefore, even if there is no change in the estimates of the delays or defaults, there will still be a change in the ECL estimates, due to unwinding of the discount. The unwinding of the discount results in reduction of the ECL allowance.
- The assessment of ECL has to be done even if the loan is perfectly performing. In fact, ECL computation has to be done at the very inception of the loan, when the question of monitoring its performance does not arise. As to why ECL is relevant for a performing loan, see discussion below.