1. User Guide
  2. Stage Determination Rules

32 Stage Determination Rules

The IFRS 9 guidelines require each account to be classified into three different stages on every reporting date, based on the significance of an increase in Credit Risk from the initial recognition. The guidelines mandate the calculation of a 12 Month or Lifetime Expected Credit Loss for an account, depending upon the stage in which an account, or instrument, has been classified into.

While defining the Stage Determination rule, the user needs to first select the modelling set. The service supports the Stage Determination requirements of the IFRS 9 guidelines by considering the following factors to determine the Significance of an Increase in Credit Risk, thereby deciding the stage into which a particular account is classified. These factors are divided into quantitative and qualitative parameters. Financial institutions can customize this based on regulatory and business requirements. The stage determination rule works conservatively, the worst stage gets assigned to the account if multiple parameters provide different stages to the account. i.e. if the account gets stamped to Stage 1 based on the 1st rule parameter and Stage 3 based second rule parameter then on the conservative principle the application will stamp Stage 3 to that account. :

Quantitative Parameters:

  • Rating (Long term): Depending upon the Long-term Rating on the Date of Initial Recognition and the Rating on the Current reporting date, the accounts are classified into one of the three stages. Rating as of Initial Recognition and current reporting date is obtained as a download and is reclassified to the Internal Rating. Users can create bands based on the rating which shows common behaviour and configure the range of notch for the individual band which is considered a significant increase in Credit Risk.
  • Rating (Short Term): Depending upon the Short-term Rating on the Date of Initial Recognition and the Rating on the Current reporting date, the accounts are classified into one of the three stages. Rating as of Initial Recognition and current reporting date is obtained as a download and is reclassified to the Internal Rating. Users can create bands based on the rating which shows common behaviour and configure the range of notch for the individual band which is considered a significant increase in Credit Risk.
  • Days Past Dues: The user can create bands based on days past dues and directly tag them to individual stages.
  • FICO Score: FICO Score is the same as credit score. Depending on the FICO score on the Date of Initial Recognition and the FICO Score on the Current reporting date, the accounts are classified into one of the three stages. FICO Score as of Initial Recognition and current reporting date is obtained as a download. Users can create the bands based on the FICO score which shows common behaviour and configure the range of notch for the individual band which is considered as a significant increase in Credit Risk.
  • LTV: LTV is the Loan to Value. Depending on the LTV on the Date of Initial Recognition and the LTV on the Current reporting date, the accounts are classified into one of the three stages. LTV as of Initial Recognition and current reporting date is obtained as a download. Users can create the bands based on the LTV that shows the common behaviour and configure the range of notch for the individual band that is considered as a significant increase in Credit Risk.
  • 12 Month PD: Band creation is not required for 12 Months PD. This will work on an absolute change basis. User can customize absolute change for each stage and based on that stage determination take place.
  • Lifetime PD: Band creation is not required for Lifetime PD. This will work on an absolute change basis. User can customize absolute change for each stage and based on that stage determination take place.

Formulas

  • Notch Movement applies to quantitative parameters: Rating Long Term, Rating Short Term, FICO Score, LTV
    • Notch Movement= Current – Original
  • The absolute change applies to quantitative parameters: 12 Month PD, Lifetime PD
    • Absolute Change= (Current/Original -1) *100

Qualitative parameters:

  • New Account: New accounts can be tagged as Stage 1. Other qualitative or quantitative parameters are immaterial because financial institutes already factor in the business risk while initiating banking relationships with new customers.
  • Devolvement: Devolvement is defined as a situation when a security or debt issue is undersubscribed. Devolved accounts can be tagged as Stage 2.
  • Impaired: Impaired is defined as an account with a very low credit score. Impaired accounts can be tagged as Stage 2.
  • Default: Defaulted accounts can be tagged as Stage 3
  • Forbearance: Forbearance is defined as when a lender allows you to temporarily pay a lower loan payment or pause a loan payment. Forbearance accounts can be tagged as Stage 2.
  • Restructured: Renegotiated or modified accounts can be tagged as Stage 2.
  • Country: Users can create groups of countries that show similar economic behaviour. Based on economic guidance, users can tag these country groups under Stage 1, Stage 2 and Stage 3.
  • Industry: Users can create groups of industries that show similar economic behaviour. Based on economic guidance, users can tag these industry groups under Stage 1, Stage 2 and Stage 3.