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Entity A holds a 10-year amortising loan of ₹10 lakh. Initial 12-month PoD = 0.5%; LGD = 25%. At reporting date, 12-month PoD is UNCHANGED — no significant increase in credit risk. The 12-month ECL allowance is:
A₹50,000 — calculated as Loan × lifetime PoD = 10,00,000 × 5%
B₹2,500 — calculated as Loan × annual LGD = 10,00,000 × 25%
CNil — no actual default has occurred yet
D₹1,250 — calculated as Loan × 12-month PoD × LGD = 10,00,000 × 0.5% × 25%
Answer & Solution
Correct answer: D. ₹1,250 — calculated as Loan × 12-month PoD × LGD = 10,00,000 × 0.5% × 25%
Stage 1 (no SICR) → 12-month ECL = Loan × 12-month PoD × LGD = ₹10,00,000 × 0.5% × 25% = ₹1,250. This is the probability-weighted expected loss from default events possible in the next 12 months, considering both default probability and loss-given-default. Lifetime ECL applies only after SICR (Stage 2) or credit impairment (Stage 3).
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