Calculation of Allowance and Provision

After the consolidated CECL is calculated through any one of the multiple methodologies available, the Allowance and Provision values are determined. The Allowance and Provision values are calculated based on the Drawn and Undrawn portions of the accounts. For every Product type and Customer type, the application checks whether the Undrawn flag is Y or N. A Rule namely, the Undrawn Flag Assignment Rule handles the flag set for the Undrawn portion.

Under Cash Flow or forward Exposure methodology, depending on the inclusion of the undrawn portion in either the Cash flow or Forward exposure, the Current Expected Credit Loss value is apportioned as Allowance and Provision values, considering the carrying amount.

The Undrawn Flag Assignment Rule performs the check for the Undrawn flag across all the methodologies. After the check, depending on the value of the Undrawn flag, the following calculations are made:

• If the Undrawn flag is Y and the CECL > Carrying Amount, then:
  • Allowance = Carrying Amount
  • Provision = CECL - Carrying Amount
• If the Undrawn flag is Y and the CECL < Carrying Amount, then:
  • Allowance = CECL
  • Provision = 0
• If the Undrawn flag is N and the CECL > Carrying Amount, then:
  • Allowance = Carrying Amount
• If the Undrawn flag is N and the CECL < Carrying Amount, then:
  • Allowance = CECL

If the Undrawn flag is N, the Provision is calculated using the Provision Matrix method. For more details, see the Provision Matrix section.