As per the RBI’s discussion paper on the introduction

Q: Answer-As per the RBI’s discussion paper on the introduction of the Expected Credit Loss (ECL) framework fo...

The proposed Expected Credit Loss ECL framework for banks is designed to replace the current incurred loss model with a forward-looking approach. The framework would apply to financial assets that meet prescribed conditions, including Loans and advances Irrevocable loan commitments including sanctioned revolving credit facilities Lease receivables Irrevocable financial guarantee contracts Investments classified as held-to-maturity or available-for-sale These financial assets must be measured at amortised cost, following the business model of collecting contractual cash flows, and must satisfy the SPPI Solely Payments of Principal and Interest criterion. Thus, the ECL frameworks applicability is restricted to certain financial assets, not liabilities.

of the Expected Credit Loss (ECL) framework for provisioning by banks, to which category would the proposed framework apply?

A Financial assets that meet specified conditions Correct Answer Incorrect Answer

B Financial liabilities that meet specified conditions Correct Answer Incorrect Answer

C Both financial assets and financial liabilities Correct Answer Incorrect Answer

D Financial liabilities irrespective of conditions Correct Answer Incorrect Answer

E None of the above Correct Answer Incorrect Answer

Solution

The proposed Expected Credit Loss (ECL) framework for banks is designed to replace the current incurred loss model with a forward-looking approach. The framework would apply to financial assets that meet prescribed conditions, including: • Loans and advances • Irrevocable loan commitments (including sanctioned revolving credit facilities) • Lease receivables • Irrevocable financial guarantee contracts • Investments classified as held-to-maturity or available-for-sale These financial assets must be measured at amortised cost, following the business model of collecting contractual cash flows, and must satisfy the SPPI (Solely Payments of Principal and Interest) criterion. Thus, the ECL framework’s applicability is restricted to certain financial assets, not liabilities.

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SIDBI Grade A (Assistant Manager)

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