Every provision number in a bank's accounts comes down to three inputs: the chance of default (PD), the loss if it happens (LGD), and the exposure at that moment (EAD). Pick a stage, set the inputs, and watch the number build — year by year for lifetime ECL.
Step 1 — which stage is the loan in?
Stage decides the measurement horizon. Click a card to select.
Stage 1 Performing
No significant increase in credit risk since origination. Interest recognised on gross carrying amount.
→ 12-month ECL
Stage 2 Underperforming
Significant increase in credit risk (SICR) — e.g. 30+ days past due, watchlist, downgrade. Interest still on gross.
→ Lifetime ECL
Stage 3 Credit-impaired
Defaulted / objective evidence of impairment — typically 90+ days past due. Interest on the net (amortised cost − ECL).
→ Lifetime ECL, PD = 100%
Step 2 — the inputs
Rs
%
%
years
%
Step 3 — the formula, live
ECL provision
—
—
Coverage ratio
—
ECL ÷ EAD
Lifetime PD
—
—
Net carrying value
—
EAD − ECL
The lifetime build — year by year
Each year's expected loss = the chance the loan survives to that year and then defaults (marginal PD), × LGD × EAD, discounted back at the EIR.
Year
Survival to start
Marginal PD
Expected loss
DF @ EIR
Discounted
What's simplified here
Constant annual PD (a flat hazard rate) — real models use PD term structures that usually decline for seasoned loans, plus forward-looking macro overlays across multiple probability-weighted scenarios.
EAD held flat — real models amortise it down a repayment schedule and add expected drawdowns on undrawn limits (via a CCF).
LGD as one number — in practice it's collateral-driven, discounted cure/recovery paths, floored by regulators.
Mid-year default timing convention: losses discounted from year-end for simplicity.
Illustrative teaching tool — not an accounting policy, not advice, and not any specific bank's methodology.