7.1.1.6 Recovery
Recovery assumes the part/full amount is recovered from delinquent/ defaulted accounts. In this assumption, the contractual cash flows assigned to the overnight time bucket is considered. Even though contractually it is due immediately, the actual recovery takes place only over a period of time. In this assumption, the contractual cash flows assigned to the overnight time bucket is considered. You are allowed to specify the percentage of recovery in each time bucket based on past experiences. The balance percentage which is not specified by you is placed in the unspecified time bucket. Therefore, the contractual cash flow is first deducted from the overnight time bucket and assigned to various other time buckets based on the defined percentages.
See Defining a New Business Assumption for information on the steps involved in specifying this assumption. The following steps are involved in applying the delay in cash flow timing assumption to cash flows:
- If time-specific or critical obligation, record the delay and indicate a breach.
Cash flow assignment is done for delinquent/defaulted cash flows in the following manner:
Figure 7-4 Formula for cash flow assignment for delinquent or defaulted cash flows
The following example shows the assumption applied to product type (loan), legal entity (LE 1), and currency (USD):
Table 7-7 Cash Flow Movement - Recovery
Business Assumption Definition Cash Flow Assignment Product Type Legal Entity Currency Loan Status Time Bucket Business Assumption Time Bucket Default Cash Flow Business Assumption Adjusted Cash flow Product 01 LE 1 USD Default 1 – 30 days 10% Overnight 10000 0 [=(10000-10000)] 1 – 30 days 10% 1000 [= (10% *10000)] 30 – 60 days 15% 30 – 60 days 15% 1500 [=(15%* 10000)] 60 – 180days
25% 60 – 180 days 25% 2500
[=(25% * 10000)]
Unspecified that is, 180 - 5000
[=(10000-1000-1500-2500)]