Forward Exposure Calculations

Stage One Accounts

For Stage 1 accounts, the forward exposures up to the maturity or life term of the account are considered but only the 12 month PD is taken into account. The Per Period Loss is calculated from the Forward exposure, PD, and LGD values.

Note:

The Marginal PD for 12 months or 1 year is considered for Stage one accounts.

After calculating the Per Period Loss, the ECL is calculated as the present value of Per Period losses.

The Effective Interest Rate (EIR) is used for discounting while calculating the ECL.

Stage Two accounts

For Stage 2 accounts, the forward exposures and the PD up to the maturity of the account are considered. The Per Period Loss is calculated using Forward Exposure, Marginal PD, and LGD.

Note:

The Marginal PD for an entire lifetime of the account is considered for Stage Two accounts.

After calculating the Per Period Loss, the ECL is calculated as the Present value of Per period losses.

The Effective Interest rate (EIR) is used for discounting while calculating the ECL.

Stage Three accounts

The Forward Exposure approach for accounts in Stage 3 is similar to that of Stage 2.

POCI accounts

For POCI accounts, the forward exposures and the PD up to the maturity of the account are considered. Per Period Loss is calculated using the Forward Exposure, Marginal PD, and LGD.

Note:

The Marginal PD for the entire lifetime of the account is considered for POCI accounts.

After calculating the Per Period Loss, the ECL can be calculated as the Net Present Value of Per Period Losses adjusted for the Expected Credit loss as of Initial recognition.

The Credit adjusted EIR is used for discounting while calculating the ECL.

Assigning the PD Values for Each Cash Flow Date or Bucket

The PD assignment happens within the ECL run as part of the Cashflow or forward exposure methodology. First, the cumulative PD matches the account's Term structure ID, Account's Rating, or DPD, and the bucket number is populated against the account's cash flow - based on the cash flow's bucket. Next, based on the current and previous bucket numbers, the difference in the period, and the marginal PD values are computed.