The Historical Loss Rate Run is used to compute the loss rates for various Portfolios or Segments based on the historical data available within the application.
Computation of Historical Loss Rate requires certain parameters to be defined. This is done with the help of Rules that populates the values in a specific Param table. The parameters are defined at a Segment or Portfolio level. The parameters that are required to be defined are the following:
· EIR Computation Flag: Identifies the Portfolios or Segments for which Transition matrices have to be created.
· Transition Matrix Type: Defines whether the matrix must be based on Rating (R) or Delinquency Past Due Days Band or DPD Bands (D).
· Transition Matrix Frequency: Indicates the frequency of the matrix as Annual (Y), Semi-Annual, or Half Yearly (H), Quarterly (Q), and Monthly (M).
· Transition Matrix Basis: Indicates if the computation happens based on the Number of Accounts (N) or Outstanding Amount (O).
NOTE:
Segmentation (Portfolios) is a mandatory prerequisite for the computation of the Historical Transition Matrix.
The source data for both the Historical Average Transition Matrix and Historical Loss Rate computation is the Multiple Rating Preferences table, where data across each MIS Date is available at an account level granularity. The Multiple Rating Preferences table has information across multiple dimensions that help map each account to a Rating or Delinquency Past Due Band and the various Segments under which the accounts fall.
The first processing step in the Historical Loss Rate Computation process is to group all the accounts based on the Default Grade Rating or the Default DPD Band for the given date. After the accounts are grouped, the total outstanding, total recovery, and total write-off amounts are summed up across these accounts. This step is done only for the given MIS Date.
NOTE:
Only the accounts in the default grade are considered.
The second step in the process is to compute the Loss Rate for the given MIS Date using the following formula:
Loss Rate (t) = [Write-offs (t) - Recoveries (t) ] or Outstanding (t-1)
These loss rates are then used for the Average 12 month and Lifetime Gross Loss Rate computation within the Roll Rate methodology.
NOTE:
During the initial Run, historical data will not be available for computation. You need to ensure that historical data is populated manually before executing the Historical Loss Rate Run. OFS Loan Loss Forecasting and Provisioning application stores all the required data from the initial Run onwards. The duration of required historical data is dependent on the value provided in the Loss Rate Historical Data Cap and Loss Rate Historical Data Cap Unit columns of the Application Preferences table. If you update the Loss Rate frequencies that were previously set in the application, you will have to re-execute all the pre-executed Runs for the duration mentioned in the Application Preference table.
Historical data needs to be populated to the columns of the FSI_LLFP_HIST_LOSS_RATE table.