Average Transition Matrix Computation

The second step in the process is to compute the Average Transition Matrix, based on the Rating or DPD band movements computed across historical dates. The number of periods to look back is decided based on the Preferences set in the LLFP Preference table, based on which the outstanding amounts or number of accounts are summed up for the computation purpose.

To compute the Transition Rates, the total migration value, the number of accounts, or outstanding amount, between any two Ratings or DPD bands is divided by the total value, several accounts, or outstanding amount, on the base Rating or DPD Band.

The results, Transition Matrices, across segments are then stored in the Transition Matrix Master and Transition Matrix Details tables.

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 Matrix 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 Transition Matrix Historical Data Cap and Transition Matrix Historical Data Cap Unit columns of the Application Preferences table. If you update the Transition Matrix 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.

The number of historical periods for which the average matrix is computed is dependent on the value provided in the LLFP app preference table. When the value of N is provided, the average transition matrix is computed using N-1 individual transitions.

Historical data needs to be populated to the columns of the FSI_LLFP_AVG_MOVEMENT_MTX table.