Posts

Expected credit losses on loans: Guide for NBFCs

/0 Comments/in , , /by

– 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.
Read more →

Stressed for reform: RBI proposes stressed assets securitisation and loss provisioning

/0 Comments/in , , , /by

– Team Finserv (finserv@vinodkothari.com)

Rating agency Standard and Poor’s recently noted that at least 60 percent of the world’s economies are either into recession already or heading towards the same. The same report notes that 29 of the 33 countries covered by the study have disorderly inflation above the targets set by the respective central banks[1]. OECD’s interim report of September, 2022 says that despite a boost in activity as COVID-19 infections drop worldwide, global growth is projected to remain subdued in the second half of 2022, before slowing further in 2023 to an annual growth of just 2.2%. This is accompanied by inflationary pressures in most countries[2]. India is one of the two countries projected to have a growth rate of more than 6%.

The RBI’s monetary policy, September, 2022, as expected, has announced an interest rate hike of 50 bps in the policy rates.

Read more →