| CIM FINANCE. INTEGRATED REPORT 2022 136 EXPLANATORY NOTES 30 SEPTEMBER 2022 4. FINANCIAL RISK MANAGEMENT (CONT’D) 4.1 Financial risk factors (Cont’d) (d) Credit risk (Cont’d) Impairment assessment (Cont’d) Definition of default and cure (Cont’d) For financial assets within stage 2, these can only be transferred to stage 1 when they are no longer considered to have experienced a significant increase in credit risk. Where a significant increase in credit risk was determined using quantitative measures, the instruments will automatically transfer back to stage 1when the criteria are no longermet. Where instruments were transferred to stage 2 due to assessment of qualitative factors, the issues that led to the reclassificationmust be cured before the instruments can be reclassified to stage 1. It is the Group’s policy to consider a financial instrument as ‘cured’ and therefore re-classified out of Stage 3 when none of the default criteria have been present for at least six consecutive months. The decision whether to classify an asset as Stage 2 or Stage 1 once cured depends on the updated credit grade, at the time of the cure, and whether this indicates there has been a significant increase in credit risk compared to initial recognition. The calculation of the Expected Credit Losses Expected Credit losses are computed as probability weighted amounts which are determined by evaluating a range of reasonably possible outcomes, the time value of money, and considering the reasonable and supportable information including that which is forward-looking. The Group makes use of logistic regression techniques to determined the PD, LGD and EAD where adequate default data is available. The Group calculates expected credit losses (‘ECLs’) under IFRS 9 using forward-looking judgements, models and data. As such, under the current economic conditions and uncertainty arising due to COVID-19, management overlays have been applied to cater for the risks and uncertainties that cannot be adequately reflected in the existingmodels. TheGroup continues to monitor the overlays as the environment is subject to change and updated facts as new information becomes available. The period over which cash flows are determined is generally limited to themaximumcontractual period for which the Group is exposed to credit risk, with the exception of credit cards - themaximumperiod for which the credit losses are determined is the contractual life of a financial instrument unless the Group has the legal right to call it earlier. These expected cash flows are discounted using the effective interest rate on the financial instruments. ECL for financial assets classified under stage 3 ismeasured at the individual obligor level except for individually insignificant facilities with similar risk characteristics which are grouped together and the ECL is determined based on history of losses. Probability of Default The probability of default (PD) refers to the likelihood that a borrower will default over a particular time horizon. The PD of an obligor is a fundamental risk parameter in credit risk analysis and depends on obligor specific characteristics as well as on macroeconomic risk factors. The Group has adopted the IFRS 9macroeconomic sensitive model for PD computation, which is based on following set of assumptions: Assumption Description Default observation Anobligator is assumed to enter default state in anymonthwherein it crosses 90 days past due. Any observation following such default has been excluded Macro-sensitive PD PD is assumed to be sensitive to changes in macroeconomic conditions Term structure The PD termstructure is computed for a period of next 5 years and considered constant above this horizon. The basis for the assumption is validated by the convergence of macroeconomic forecasts post the 5 year period
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