Description

The new Financial Instruments IFRS 9 impairment model requires impairment allowances for all exposures from the time a loan is originated, based on the deterioration of credit risk since initial recognition. The credit risk has not increased significantly (Stage 1), IFRS 9 requires allowances based on 12-month expected losses. The credit risk increases significantly (Stage 2). The loan’s credit risk increases to the point where it is considered credit-impaired, and interest revenue is calculated based on the loan’s amortized cost. The standard requires allowances based on lifetime expected losses. The assessment of whether a loan has experienced a significant increase in credit risk varies by product and risk segment. It requires the use of quantitative criteria and experienced credit risk judgment. As opposed to IAS 39 which required a best estimate approach, Financial Instruments IFRS 9 requires multiple forward-looking macro-economic and workout scenarios for the estimation of expected credit losses. Financial Instruments IFRS 9 requires a forward-looking macroeconomic adjustment, applied to the historical loss rate. To incorporate this element, multiple regression analysis has been performed using finance.gov.pk and tradingeconomics.com, considering the following factors:

• Independent variable: the real GDP, the growth of the country indicator
• Dependent variable(s): the public debt, a market indication of credit risk. The calculated impact of the regression analysis is a 25% incremental increase in historical loss rates, ie. PD x LGD x 1.25. “

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Effective and efficient structures to govern and oversee the organization and achieve the strategy creating synergies between different risk management activities.

Risk Awareness

Increased risk awareness which facilitates better operational and strategic decision-making. Ensuring that risk-taking decisions across the organization are within and aligned to the nature and level of risk that stakeholders in the organization are willing to the take;

• Independent variable: the real GDP, the growth of the country indicator

• Dependent variable(s): the public debt, a market indication of credit risk

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