THE BUSINESS APPLICATION
Where and how to use it
Use it when comparing secured and unsecured lending, assessing recovery scenarios and estimating expected credit loss. It helps expose the difference between a large eventual recovery and a smaller, faster recovery with lower costs.
A business-purpose property-backed loan defaults. The team compares timely settlement with a longer collateral-realisation path, including expenses and discounting, rather than assuming the property value will be collected immediately.
From evidence to a decision
- 01Exposure at defaultStarting claim on the borrower
- 02Recovery pathReceipts minus recovery costs
- 03Time adjustmentDiscount dated net recoveries
- 04Economic lossCompare with default exposure
DATA REQUIREMENTS
What records does it need?
These are the records your team would bring together for this analysis. The exact fields and history needed depend on your lending products, the question you want to answer and the period you want to assess.
| Record category | What it contains | Why the detail matters |
|---|---|---|
| Default exposure | Account, default date and exposure at default. | Apply a consistent exposure definition. |
| Recovery cash flows | Receipt amounts and dates, recovery costs and their dates. | Include zero recoveries and unfinished workouts. |
| Collateral and resolution | Security details, dated valuations, realisation events and resolution status. | Valuation and realised proceeds are separate evidence. |
Past loan outcomes help assess how well an estimate reflects your borrowers. For a new decision, use only the information available at that time; later repayments help you review the result afterwards.
Understand data readiness →WHAT YOU RECEIVE
The output
An estimated loss proportion or amount, recovery assumptions, timing and sensitivity to alternative recovery paths.
WHAT TO WATCH
The limitations
Long workouts create incomplete observations. Unexpected ranges must be explained through definitions and cash flows rather than silently clipped.
FOR RISK & ANALYTICAL SPECIALISTSHow the analysis works+
The modelling approach
Approaches include bounded or two-part severity models and explicit discounted recovery calculations. Recoveries, direct costs and discounting conventions must reconcile. Unresolved cases remain visible instead of being discarded as if recovery were complete.
What your risk team should review
Cash-flow reconciliation, cost inclusion, discounting, unresolved-case handling and recovery coverage.
The right approach depends on your portfolio and available history. Review the fit to your borrowers, the reliability of the estimates and the effect of missing information before using the result in a lending decision.