Module: | MODULE B: RISK MANAGEMENT
Q386: Scenario: A major corporate borrower of ABC Bank has missed a scheduled principal repayment deadline by 45 days due to temporary liquidity constraints. Previously, the account had a flawless repayment record. ABC Bank is currently operating under the mandated Expected Credit Loss (ECL) framework. Based on RBI guidelines for ECL, consider the following statements regarding the correct regulatory actions:
1. The account must be reclassified from Stage 1 to Stage 2 strictly due to crossing the 30-day past due threshold, indicating a Significant Increase in Credit Risk (SICR).
2. The bank must now calculate and hold a Lifetime Expected Credit Loss provision for this specific exposure.
3. The account remains classified as a standard asset requiring only a 12-month ECL provision until it breaches the 90-day Non-Performing Asset limit.
Which of the statements given above is/are correct?
2. The bank must now calculate and hold a Lifetime Expected Credit Loss provision for this specific exposure.
3. The account remains classified as a standard asset requiring only a 12-month ECL provision until it breaches the 90-day Non-Performing Asset limit.
Which of the statements given above is/are correct?
✅ Correct Answer: C
The correct answer is C. Statement 1 is correct: Under the ECL framework (Ind AS 109), a rebuttable presumption exists that credit risk has increased significantly since initial recognition when contractual payments are more than 30 days past due.
Since the borrower is 45 days overdue, it hits the Significant Increase in Credit Risk (SICR) trigger, mandating an immediate shift from Stage 1 to Stage 2. Statement 2 is correct: Once an asset is categorized as Stage 2 (Underperforming), the provisioning requirement structurally shifts.
The bank must upgrade its provision from a 12-month ECL to a Lifetime ECL, reflecting the heightened risk of default over the remaining life of the loan.
Statement 3 is incorrect: Waiting for the 90-day mark (which triggers Stage 3 / NPA status) to change provisioning defeats the forward-looking nature of ECL.
The account cannot remain in Stage 1 with a 12-month ECL once it has breached the 30-day SICR threshold.
Since the borrower is 45 days overdue, it hits the Significant Increase in Credit Risk (SICR) trigger, mandating an immediate shift from Stage 1 to Stage 2. Statement 2 is correct: Once an asset is categorized as Stage 2 (Underperforming), the provisioning requirement structurally shifts.
The bank must upgrade its provision from a 12-month ECL to a Lifetime ECL, reflecting the heightened risk of default over the remaining life of the loan.
Statement 3 is incorrect: Waiting for the 90-day mark (which triggers Stage 3 / NPA status) to change provisioning defeats the forward-looking nature of ECL.
The account cannot remain in Stage 1 with a 12-month ECL once it has breached the 30-day SICR threshold.