Module: | MODULE B: RISK MANAGEMENT
Q385: Consider the following statements regarding the classification of financial assets under the RBI Expected Credit Loss (ECL) framework based on Ind AS 109:
1. Stage 1 comprises financial assets that have not experienced a significant increase in credit risk since initial recognition, requiring a 12-month ECL provision.
2. Stage 2 includes assets that have suffered a Significant Increase in Credit Risk (SICR), requiring the bank to immediately recognize a Lifetime ECL provision.
3. Stage 3 assets are those with objective evidence of being credit-impaired, but they revert to requiring only a 12-month ECL provision to assist recovery.
Which of the statements given above is/are correct?
2. Stage 2 includes assets that have suffered a Significant Increase in Credit Risk (SICR), requiring the bank to immediately recognize a Lifetime ECL provision.
3. Stage 3 assets are those with objective evidence of being credit-impaired, but they revert to requiring only a 12-month ECL provision to assist recovery.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. The Expected Credit Loss (ECL) framework fundamentally shifts provisioning from an "incurred loss" model to a forward-looking model based on three distinct stages.
Statement 1 is correct: Stage 1 includes performing assets where credit risk has not increased significantly.
The bank must recognize a provision equal to the 12-month expected credit losses.
Statement 2 is correct: Stage 2 is triggered when there is a Significant Increase in Credit Risk (SICR) since initial recognition (e.g., 30 days past due). Because the risk profile has deteriorated, the bank must recognize a Lifetime ECL provision.
Statement 3 is incorrect: Stage 3 includes non-performing, credit-impaired assets (e.g., 90 days past due). These assets DO NOT revert to a 12-month ECL.
They mandate a Lifetime ECL provision, often evaluated on an individual basis with severe impairment overlays.
Statement 1 is correct: Stage 1 includes performing assets where credit risk has not increased significantly.
The bank must recognize a provision equal to the 12-month expected credit losses.
Statement 2 is correct: Stage 2 is triggered when there is a Significant Increase in Credit Risk (SICR) since initial recognition (e.g., 30 days past due). Because the risk profile has deteriorated, the bank must recognize a Lifetime ECL provision.
Statement 3 is incorrect: Stage 3 includes non-performing, credit-impaired assets (e.g., 90 days past due). These assets DO NOT revert to a 12-month ECL.
They mandate a Lifetime ECL provision, often evaluated on an individual basis with severe impairment overlays.