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I am starting a series of blogs on IFRS9 'Expected Loss Provisioning'. In the next few days I will discuss how to model Expected Loss as per New accounting norms.
I will be using Simple Excel spreadsheets for discussions. If anyone has any questions, feel free to contact at 9780564549

Question 1 Why Expected Loss Provisions are required -
1 Pricing (Int. rates) is biased, int. rates are biased and driven by strategic concerns
2. Earlier RBI Provisions - Prescriptive guidelines for identification + provisioning
New Expected Loss Provisions - Currently Impaired + Credit that may impair in future
3. Eg 1. Suppose a loan is given to Telecom company, now there is some problems with 4G licence which will cause huge losses to company.
So Expected Loss Provisions - are they forward looking?
Eg 2. Suppose loan is given to Tata Steel, now Tata is sexpected to face huge problems because of Steel dumping
So again are my provisions - considering loss due to theses macro economic factors.
Current Provisioning is a) not Bank Specific b) no prescribed basis (just to meet regulatory objectives like promoting a certain loan)
Provisioning is required to smoothen out profits of Bank in long term rather than balance sheet taking a hit because of sudden losses

Question 2 For Which Instruments are provisions required
Provisions are not applicable to Financial assets measured at FVTPL
FVTPL - No ECL because losses are already going in PnL
Not FVTPL - ECL

Question 3 How to calculate Provisions ?
Step 1 Check whether ECL provisioning applies to the Co. & Instrument or not? Doubt
Companies Companies on whom Ind AS applies - Have to do ECL Provisioning eg. Bank following Standardized approach + Ind AS applicable
Companies adopted IRB approach - Have to do ECL Provisioning whether Ind AS followed or not
Why ? To Compare Provisions already held vs Estimated ECL Provisions
Instruments No FVTPL - ECL

Step 2 Identify the approach with which ECL provisioning needs to be done eg for Banks & FI - General approach , for NBFC - Specific approach, For Trade & Contract receivables etc.
Step 3 Define a strict criteria for identifying an asset as Stage 1 or Stage 2 or Stage 3 because calculations of ECL depends on it.
What are these stages ?
Stage 1 - Performing Asset - Low Credit Risk
What is 'low' - Depends on banks definition of low eg rating AA ++, PD

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