Definition
Expected Credit Loss (ECL)
Expected Credit Loss is a forward-looking provisioning model under Ind AS 109 that estimates likely loan losses based on probability of default, not just incurred defaults.
Under Ind AS 109, NBFCs and other Ind AS-compliant lenders provision for loans using ECL, which projects losses across three stages based on whether credit risk has increased significantly since origination. This is more anticipatory than the RBI's rule-based provisioning followed by banks.
ECL uses probability of default, loss given default and exposure at default to model losses, incorporating macroeconomic forecasts. The RBI has proposed moving banks to an ECL framework too, which would make bank provisioning more forward-looking and potentially more volatile.
Related terms
- Provision Coverage Ratio (PCR)The Provision Coverage Ratio is the proportion of a bank's gross non-performing assets covered by provisions, showing how well it is buffered against loan losses.
- Credit CostCredit cost is the provisioning a bank or NBFC books for bad and doubtful loans during a period, usually expressed as a percentage of average advances.
- Probability of Default (PD)Probability of Default is the estimated likelihood that a borrower will fail to meet its obligations over a given period, a key input to credit-loss models.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.