DRAFT ECL NORMS Banks to flag high loss-given default provisioning

WITH THE RESERVE Bank of India (RBI) set to stop receiving feedback on the draft expected credit loss (ECL) framework by November 30, banks are seeking flexibility on the loss-given default (LGD) assumption of 45% for exposures secured by eligible collateral. Lenders argue that this could overstate the loss potential in certain asset classes.

- KSHIPRA PETKAR & MAHESH NAYAK

“Gold is also considered an eligible collateral. In such cases, assigning an LGD of 45% seems excessive; a 5-10% level would be more realistic,’ said a senior official of a public sector bank.

Loss-given default is a measure of the percentage of a loan that a lender is likely to lose if the borrower defaults even after recovery has been made. For example, if a borrower defaults on a property loan of %1 crore and the bank cannot recover it even after selling, it will be sitting at a loss. Therefore, the bank will have to make provisions on the assumption that the borrower will default and the recovery won’t cover the cost of lending.