Expected Credit Loss

Expected Credit Loss
 

News: The Reserve Bank of India (RBI) is preparing for a major change in the banking system and will implement expected credit loss (ECL) on banks soon.
 

What is ECL?
 ECL is a method of accounting for credit risk based on the loss likely to occur on a loan or portfolio of loans. It is used to get an understanding of the potential future losses on financial assets and how those losses can be identified and addressed in the financial statements.
 Thus, through ECL, banks can estimate the forward-looking probability of default for each loan, and then by multiplying that probability by the likely loss given default, the bank gets the percentage loss that is expected to occur if the borrower defaults.
 The resulting value multiplied by the likely exposure at default is the expected loss for each loan, and the sum of these values is the expected loss for the entire portfolio.
 

Impact:
 After the implementation of the rules related to ECL, banks will have to inform the RBI of their estimated loan losses in advance.
 The system will help make Banks be more resilient in the long run.
 In such a situation, loan provisioning of banks will increase and profit books may be affected.
Source – Zee Business