As per the recently published discussion paper on Introduction of Expected Credit Loss Framework for Provisioning by Banks, on the basis of credit risk as compared to the initial recognition, what classification requirement would banks be required to follow for applicable financial assets?

Solution

On the basis of credit risk as compared to the initial recognition, banks would be required to classify applicable financial assets into three stages: Stage 1 includes financial assets that have not had significant increase in credit risk since initial recognition or that have low credit risk at the reporting date. For these assets, 12-month ECL are recognized. Stage 2 includes financial instruments that have had a significant increase in credit risk since initial recognition (unless they have low credit risk at the reporting date) but that do not have objective evidence of impairment. For these assets, lifetime ECL are recognized. Stage 3 includes financial assets that have objective evidence of impairment at the reporting date. All financial assets that are in “default” as defined in this paper shall be classified as Stage 3 assets. For these assets, lifetime ECL are recognized.