| CIM FINANCE. INTEGRATED REPORT 2022 70 RISK MANAGEMENT REPORT 3.2. CREDIT RISK MEASUREMENT CREDIT SCORECARDS CFSL uses an Experian developed application and behavioural-developed scorecards to assign credit scores to clients and to approve credit applications up to a certain amount for eligible borrowers for credit finance and personal loans through a robust credit decisioning tool with respect to consumer finance clients. The tool uses a scorecard approach based on a combination of factors, which may include the client’s historical experience with CFSL and updated information provided by the client. Applications that do not meet scorecard decisioning requirements may be referred to an independent credit underwriting team for manual assessment. The scorecards are regularly reviewed to ensure that the performance has not deteriorated and are recalibrated as appropriate. The scorecard models were last enhanced in 2022 with more predictive variables to ensure that the portfolio credit quality remains within risk/return expectations. LOAN IMPAIRMENT UNDER IFRS 9 CFSL adopted the international accounting norms IFRS 9, which requires the incorporation of past events, current conditions and reasonable and supportable unbiased forward-looking information over the life of existing exposures tomeasure expected credit losses (ECL). Commensuratewith the requirements of IFRS 9, CFSL has considered both quantitative and qualitative information in the assessment of significant increases in risk. As planned, the ECLmodels were revalidated in 2022 by taking into consideration past performance, including recent datasets considering the Covid-19 impacted economic performance and other forward-looking macroeconomic variables as inputs. Although the models have been revalidated, it is likely to be difficult at this time to incorporate the specific effects of Covid-19, the impact of Russian-Ukraine war, an elevated inflation and other unknown variables in the models. CFSL has therefore taken steps to continue to consider post-model overlays or adjustment in the models. The environment is subject to rapid change and updated facts and circumstances continue to be monitored as new information becomes available. CFSL generates a forward-looking base case scenario and other forward-looking as key inputs into the expected credit loss provisioning models. The Expected Credit Loss is the product of PD, LGD and EAD. ECL = PD (PROBABILITY OF DEFAULT) X LGD (LOSS GIVEN DEFAULT) X EAD Probability of Default (PD) • The likelihood that a borrower will default over a particular time horizon. • A fundamental risk parameter in credit risk analysis and depends on obligor specific characteristics as well as on macroeconomic risk factors. Loss given Default (LGD) • The magnitude of the likely loss on a given facility in the event of default. • Takes into account the loss of principal, interest foregone and workout expenses. Exposure at Default (EAD) • The gross carrying amount of the financial instruments in the event of obligor default. • For Stage 1 exposures, the EAD is derived based on possible default events within 12 months. • For Stage 2 and Stage 3 exposures, the exposure at default is considered for events over the lifetime of the instruments.
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