PD–LGD–EAD stitched together: a complete mini ECL example

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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)

expected_credit_loss_ecl

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 this in the Excel version later)

Step 2: Build EAD paths using amortisation

We now project month-wise outstanding using PPMT logic.

Below is a simplified amortisation output (rounded).

Table 2: Monthly outstanding path (EAD)

expected_credit_loss_ecl
expected_credit_loss
expected_credit_loss


Step 3: Portfolio-level EAD view

Now aggregate exposure.

Table 3: Portfolio EAD over time

Step 4: Allocate PD over the 12-month horizon (simplified)

To keep this example transparent, we assume:

  • Defaults occur uniformly over 12 months

  • So monthly PD = 12% ÷ 12 = 1% per month

(Yes, this is a simplification.
We will fix this properly in the next article using marginal PD.)

Step 5: Compute Expected Default Exposure (EAD × PD)

Table 4: Expected default exposure month-wise

Total expected default exposure over 12 months
≈ ₹12,140

(This approximates 12% × average EAD.)

Step 6: Apply LGD to get Expected Loss

Now apply LGD = 60%.

Table 5: Expected credit loss build-up


Step 7: Final 12-month ECL number

Table 6: Total ECL


So:

Expected Credit Loss = ₹7,284
ECL as % of portfolio = 2.43%

No magic.
No black box.

Just:

ECL = PD × EAD × LGD

What this example deliberately simplified

To keep this example readable, we intentionally simplified:

  • Marginal PD derivation

  • Survival probabilities

  • Discounting

  • Stage 2 lifetime ECL

  • Bucket-wise PD and LGD

  • Loan-level ECL allocation

Those are not omissions.

They are next steps. 

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