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Expected Credit Loss (ECL) in India shifts financial reporting from a reactive, incurred-loss accounting model to a forward-looking credit risk framework under Ind AS 109. Applying across corporates, NBFCs, and scheduled commercial banks under RBI guidelines, ECL governs trade receivables, debt investments, financial guarantees, and inter-company loans.
The general framework employs a three-stage model tracking significant credit deterioration to recognise 12-month or lifetime losses, alongside a simplified provision matrix for receivables. Incorporating default probabilities, collateral recoveries, and forward-looking macroeconomic forecasts, ECL acts as an essential governance tool for corporate risk foresight.
The Uncomfortable Question
Imagine the scene: the chief financial officer of a medium-sized company that builds roads and bridges is going over the company's financial reports for the year. Then, the auditor speaks up and asks a question that makes everyone stop and think. “What loss allowance have you recognised on the ₹450 crore inter-company loan extended to your subsidiary in the UAE?”
The CFO pauses. “But it is a group company. We have a board resolution and a support letter. Surely there is no credit risk?”
