PD–LGD–EAD stitched together: a complete mini ECL example
In the previous three guides, we explained PD , LGD , and EAD separately. Now we stop explaining. We calculate . This article walks through a complete Expected Credit Loss (ECL) calculation using: One small portfolio One 12-month timeline One clear set of assumptions If you follow the tables carefully, you should be able to rebuild this in Excel yourself. Step 0: Define the portfolio (nothing fancy) Assume today is 1 April 2024 . We have 3 live loans , all Stage 1. Table 1: Portfolio snapshot (today) Total portfolio outstanding = ₹3,00,000 Step 1: Assumptions (explicit and simple) We freeze assumptions upfront. PD assumptions (12-month) Portfolio 12-month PD = 12% We will not break it into marginal PD here. We will use a simplified allocation later. LGD assumption From historical recovery analysis: Discounted LGD = 60% Meaning: On defaulted exposure, we expect to lose 60% Discount rate Monthly discounting ignored for simplicity (We’ll add...