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    Question

    According to the RBIā€™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 RBIā€™s discussion paper on the ECL framework, aligned with Ind AS 109, allows banks to measure ECL based on credit risk changes: ā€¢ 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. ā€¢ 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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