calculate ecl for demand loans ifrs 9

​Calculating the Expected Credit Loss (ECL) for demand loans under IFRS 9 can be a bit different from term loans due to their nature. Demand loans are loans that can be recalled by the lender at any time. Since there's no fixed term for repayment, the time factor for exposure becomes uncertain. Here's a simplified approach to calculate ECL for demand loans:

1. **Estimate Exposure at Default (EAD)**:

   - For demand loans, the EAD is typically the current outstanding balance, as the loan can be called in at any time.

2. **Determine the Probability of Default (PD)**:

   - Estimating PD for demand loans might involve a more short-term focus, given the immediate nature of repayment on demand.

   - The PD could be estimated based on historical default rates of similar demand loan portfolios or adjusted based on current credit assessments.

3. **Estimate Loss Given Default (LGD)**:

   - LGD estimation should consider the recoverability of the loan in the event of default, including any collateral or guarantees.

4. **Calculate ECL**:

   

   - However, since there's no fixed term, the discounting to present value aspect might be treated differently or may not be applicable, depending on the expected timing of the cash flows.

Let's consider an example with the following parameters:

- Current outstanding balance of the demand loan portfolio: R500,000.

- Estimated Probability of Default: 1.5%.

- Estimated Loss Given Default: 50%.

We will calculate the ECL without discounting to present value, considering the immediate nature of demand loans. Based on the given parameters, the Expected Credit Loss (ECL) for the demand loan portfolio is R3,750.

This calculation is based on the current outstanding balance, as demand loans can be recalled at any time. It assumes a 1.5% probability of default and a 50% loss given default. Unlike term loans, this calculation does not involve discounting to present value due to the immediate nature of demand loans. However, in practice, the approach to ECL calculation for demand loans may vary depending on the lender's assessment of credit risk and the specific characteristics of the loan portfolio.