calculate ecl for loans receivable with collateral

​Calculating the Expected Credit Loss (ECL) for loans receivable with collateral under IFRS 9 involves considering the effect of collateral on the Loss Given Default (LGD). Collateral reduces the potential loss in the event of default, as it can be seized and sold to recover some of the outstanding amount. The steps are similar to the standard ECL calculation but with an adjusted LGD to reflect the presence of collateral.

Let's assume the following parameters for a simplified example:

1. Total outstanding balance (Exposure at Default, EAD): R1,000,000.

2. Estimated Probability of Default (PD): 2%.

3. Estimated Loss Given Default without collateral (LGD): 40%.

4. Value of collateral: R300,000.

5. Estimated recovery rate from collateral: 80% (i.e., the entity expects to recover 80% of the collateral's value).

6. Effective interest rate for discounting: 5%.

7. Estimated average lifetime of loans: 5 years.

We need to adjust the LGD to account for the collateral. The adjusted LGD is calculated as follows:

After calculating the adjusted LGD, we can proceed with the standard ECL calculation. Let's perform these calculations.

Based on the given data and adjustments for collateral, the total Expected Credit Loss (ECL) for the loans receivable with collateral, discounted to present value over the 5-year period, is approximately R13,854.33.

This calculation takes into account the reduced loss given default due to the collateral, which significantly lowers the ECL compared to a scenario without collateral. The presence of collateral and its expected recovery rate are key factors in this reduction. As with any ECL calculation, the accuracy depends on the reliability of the estimates and assumptions used, such as the probability of default, the recovery rate of the collateral, and the effective interest rate for discounting.