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      Question

      According to the RBI’s discussion paper on the

      Expected Credit Loss (ECL) model, loss allowances on lease receivables and contractual guarantee contracts must always be measured at:
      A Incurred Credit Losses Correct Answer Incorrect Answer
      B Lifetime Expected Credit Loss (ECL) Correct Answer Incorrect Answer
      C 12-month Expected Credit Losses Correct Answer Incorrect Answer
      D Either (A) or (B) depending on risk level Correct Answer Incorrect Answer
      E None of the above Correct Answer Incorrect Answer

      Solution

      The RBI’s discussion paper on the ECL framework, aligned with Ind AS 109, allows banks to measure ECL based on credit risk changes: • For most financial assets: o 12-month ECL applies if there is no significant increase in credit risk (SICR). o Lifetime ECL applies if there is a SICR or if the asset is credit-impaired. • However, lease receivables and contractual guarantee contracts are treated differently. o For these, banks are required to always recognize lifetime ECL, regardless of whether there has been a SICR. o This ensures higher prudence, given the nature of these exposures. Thus, the correct requirement is lifetime ECL.

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