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 predictive variables reflect the current credit quality and are within risk/return expectations. Measurement of the Expected Credit Loss (‘ECL’) 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 to measure ECLs. Consistent with the requirements of IFRS 9, CFSL has considered both quantitative and qualitative information in the assessment of significant increases in risk. The ECL model was last updated in 2023. Governance and post-model adjustments The IFRS 9 probability of default (‘PD’), exposure at default (‘EAD’) and loss given default (‘LGD’) models are subject to the Group’s ECL standard approved by the Risk Management Committee and the Board. Post-model adjustments were applied where management and/or the Board judged they were necessary to ensure an adequate level of overall ECL provision. Post-model adjustments are categorised as follows: • Economic uncertainty – ECL adjustments primarily arising from uncertainties associated with the macroeconomic environment along with the residual effect of COVID-19 and government support. In all cases, management judged that additional ECL was required until further credit performance data became available as the full effects of these issues matures. • Deferred model calibrations – ECL adjustments where PD model monitoring indicated that actual defaults were below estimated levels, but where it was judged that an implied ECL release was not supportable due to the influence of any support granted to the clients. Consequently, any potential ECL release is deferred until modelled ECL levels are affirmed by new model parallel runs or similar analyses. • Other adjustments – ECL adjustments where it was judged that the modelled ECL required amendment. Stage classification CFSL classifies its financial assets into three stages, conditional on material changes in the credit risk: • Stage 1 (Low credit risk) – as soon as a financial instrument is originated or purchased, 12-month ECLs are recognised in profit or loss and a loss allowance is established. This serves as a proxy for the initial expectations of credit losses. Interest revenue is calculated on the loan’s gross carrying amount (without deduction for ECLs). • Stage 2 (Significant increase in credit risk since initial recognition) – if the credit risk increases significantly and is not considered low, full lifetime ECLs are recognised in profit or loss. The calculation of interest revenue is the same as for Stage 1. • Stage 3 (Credit impaired) – if the credit risk of a financial asset increases to the point that it is considered credit-impaired, interest revenue is calculated based on the amortised cost (gross carrying amount less the loss allowance). This is similar to the point at which an incurred loss would have been recognised. These financial assets are classified in Stage 3 and are assessed individually. Lifetime ECLs are recognised on these financial assets. The transition from recognising 12-month ECLs (i.e. Stage 1) to lifetime ECLs (i.e. Stage 2) in IFRS 9 is assessed based on the notion of a significant increase in credit risk over the remaining life of the instrument in comparison with the credit risk on initial recognition. Significant increase in credit risk (‘SICR’) CFSL monitors all financial assets that are subject to the impairment requirements to assess whether there has been a significant increase in credit risk since initial recognition. If there has been significant increase in credit risk, CFSL will measure the loss allowance based on lifetime rather than 12-month ECLs. In making this assessment, both quantitative and qualitative information that is reasonable and supportable are considered, including historical experience and forwardlooking information that is available without undue cost or effort, based on the historical experience and expert credit assessment, including forward-looking information. At each reporting date, Cim assesses whether the credit risk on a financial asset has increased significantly since initial recognition as follows: (i) A 30-days past due backstop criterion is also used for SICR identification. (ii) The Company compares the risk of a default occurring on the financial asset at the reporting date based on the remaining maturity of the asset, with the risk of default that was anticipated for the remaining maturity at the current reporting date when the financial asset was first recognised. (iii) If an asset is considered ‘low risk’ at the reporting date, the Company may assume that it is not subject to SICR. 73 OUR YEAR AT A GLANCE OUR PEOPLE GOVERNANCE FINANCIAL STATEMENTS
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