How to impair unsecured loan facilities

‘Eat once, suffer once’ read a big painting on the wall in our dormitory cubic in the North Boys during my high school time at Duhaga S.S. In the cubic, all the boys shared similar characteristics; raised from not well-off families. Only a few amongst us came from middle-class families.

With such a background, we never lived a luxurious life while at school. Everything was always on the stringent budget. Life was so hard. We survived on school meals. Breakfast was like a taboo. On that Saturday evening, after enjoying a Manchester United game against Manchester City in which Paul Scholes scored in stoppage time, Bruno suggested an idea; “Boys, why don’t we contribute money amongst ourselves, go to the canteen and cause inflation.” “That way, we would be recognized by the canteen lady,” he added. Indeed, the idea paid off. The young light-skinned canteen lady baptized us a name; the ‘don group’ – meaning ‘the rich boys.’ Little did she know that she was dealing with broke students.

Within a week, the group had run out of cash. And this is how the slogan; ‘eat once, suffer once’ was born. As the group leader, I had to find a way out to having breakfast. We were one week away to the visitation day. The hopes were high for receiving some money. I went to the canteen and took credit worth Ugx45,000 with the promise that payment would be made within a week. Surprisingly, we did not manage to pull off Ugx45,000.

I changed my route to class. I dodged the canteen place. Even when I needed to buy something, I would send friends. Subsequently, I never paid the canteen lady. The expected credit loss on such a receivable is denoted by:

100% probability of default
100% loss given default
45,000 exposure at default
The expected credit loss = PD*LGD*EAD
=100%*100%*45,000
=45,000

Is your financial institution having clients of similar characteristics? They have taken unsecured loans and are not paying on time or have defaulted. You need an IFRS 9 model that speaks to such financial assets. Click here to download an IFRS 9 model for impairment or contact the summitIFRS 9 teams to get instant to advise. Email ifrs9@summitcl.com or call 0775845691 to speak to Godfrey Ssenyonjo.

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