To consider the impact of forward-looking information, NBFCs analyse co-relation of a wide range of factors with their default patterns and shortlist the factors that are relevant to their respective businesses. ECL estimates are then adjusted to consider the impact of these short-listed factors. GDP and unemployment rate were the most common macro-economic factors that were considered by the companies while evaluating the impact on their ECL computation. Further, many companies also considered inflation and interest rates.
The assessment of the impact of the COVID-19 outbreak on ECL involved significant judgement specifically because it is not directly comparable with any recent similar events. Different companies have applied different approaches to determine the impact of forward-looking factors while estimating ECL. Majority of them have applied a management overlay approach to embed the expected impact that is not fully captured by their ECL models.
While NBFCs are struggling to predict and manage credit risk amidst the pandemic, it has become imperative for them to have a strong risk management framework. Some of the factors that NBFCs may consider in risk management are assessment of creditworthiness of the borrower, mitigation of credit risk by reviewing value of collaterals on a regular basis and regular back-testing.