Definition
Loss Given Default (LGD)
Loss Given Default is the share of an exposure a lender expects to lose if a borrower defaults, after accounting for collateral and recoveries.
LGD complements probability of default in credit-loss models: PD measures how likely default is, LGD how much is lost when it happens. Well-secured loans have low LGD because collateral can be sold; unsecured loans have high LGD.
Under the expected credit loss framework, provisions equal PD times LGD times exposure at default. Stronger recovery mechanisms, such as enforcement under the SARFAESI Act or the IBC, lower effective LGD and therefore the provisions a lender must carry.
Related terms
- 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.
- Recovery (Loans)Loan recovery is the money a bank gets back from a defaulted or written-off borrower, through settlement, asset sale, legal action or insolvency proceedings.
- 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.
- 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.