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1. Facility LGD rating model
 Ex-post LGD - pertaining to already defaulted facilities
 Ex-ante LGD - pertaining to standard accounts
 Goal:
 Finding factors deriving bank loss
 Amount of losses to expect when loan do default
 Best fit model- Economically and Statistically
 Dependent Variable- LGD
 Percentage of charge off over outstanding balance at
default for each default loan
 Loss derived from net charge off= Charge off- Charge
off Recovery
 Loss derived from cash flows= Total cash outflows- Total
cash inflows
Loss derived
from net
charge off
Loss derived
from cash
flows
=
Reduce
Discrepancies
 Calculation of ∝ and β
 ∝= Beta distribution’s center parameter
= μ/Max{μ(Max- μ)/Max*δ2 – 1}
 β = Beta distribution’s shape parameter
= ∝{Max/ μ – 1}
 BetaHistLGD= betadist( HistLGD, ∝, β ,0,1)
 NhistLGD=norminv(BetaHistLGD,Mean,SD)
Beta Distribution
Normal Distribution

2. Independent Variable Description Impact
Dummy
Formation
Collateral Ratio
Collateral Ratio= Collateral Value at default(or 1 year before)/Outstanding Balance at
default LGD( or 1 year before) -ve
Risk Rating Based on Bank’s internal risk rating model +ve
Facility Type/ Other
facility Term Loan , Fixed Loan
Dummy
Variable
Industry Type
Dummy
Variable
Seniority of Loan Senior , Junior -ve
Dummy
Variable
GDP Growth Rate Percentage change from previous year
Revenue -ve
Firm Size -ve
Covenant Structure No covenant, Weak Covenant, Tight Covenant
Dummy
Variable
Current Ratio +ve
Leverage Total Debt/ Capital at default +ve
Default Reason Systematic/ Idiosyncratic
Dummy
Variable
Compromised & Settled -ve
Location Central, North, South Region
Dummy
Variable
Balance Outstanding Balance at default/ one year before default +ve
Independent Variable and its impact on LGD Estimation

3. Validation
 R^2
 Exploatory Power of the model- F Test, Chi-Square test
 Mean Square Error Test
 Out of sample and out of time Technique
 Satisfy Basel II / III Requirements.
 No black-box components
LGD model form:
LGD=∝+β1X1+ β2X2 + β3X3+……..+ βkXk
Model 3 final adjustment:
Discounted LGD=1-(RR × e-r ×T)
T- No. of recovery year
R- risk free rate+ spread
Loss Given Default (LGD) Facility Grade
0% 1
1–15% 2
16–30% 3
31–45% 4
46–60% 5
61–75% 6
76–100% 7
Facility Grading System