Commercial Banking
Expected credit loss
Why might two borrowers with the same default probability have different losses?
Loss depends on whether a borrower defaults, how much is exposed, and how much can be recovered.
Illustrative expected loss = PD × LGD × EAD
PD is probability of default, LGD is loss as a share of exposure if default occurs, and EAD is exposure at default. 0.02 × 0.40 × ₹1 crore = ₹80,000 in this one-period example.
2% default probability × 40% loss severity × ₹1 crore exposure gives ₹80,000.
PD is probability of default, LGD is loss as a share of exposure if default occurs, and EAD is exposure at default. 0.02 × 0.40 × ₹1 crore = ₹80,000 in this one-period example.
Collateral halves LGD to 20%, with other inputs fixed. What is expected loss?