Anantya Credit gives you default counts for three loan vintages of different ages. Estimate the lifetime default rate and expected loss on the youngest vintage, and judge the provision held against it.

The 2023 vintage is heading for a lifetime default rate of about 3.0%, an expected loss of about Rs 4.95 crore, so the Rs 3 crore provision is about Rs 1.95 crore short. Compare vintages at the same age: year-1 rates are 1.0%, 1.1% and 1.0%, so 2023 is tracking the older books. Both older vintages double between year 1 and year 2, and 2021 adds half again by year 3. Project 2023 along that curve: 1.0%, 2.0%, 3.0%, which is 180 defaults.

Think of judging three batches of saplings planted in different years by counting the dead ones. The batch planted last year has had one winter; the oldest has had three. Counting all the dead across all the batches tells you nothing about how many of the young batch will eventually die. A loan vintageAll the loans made in one period, tracked together over their life so that performance can be compared with other periods at the same age. must be read at a given age, and the young vintage projected along the shape the old ones have already traced. The pooled rate here is about 1.9%; the lifetime rate is nearer 3%.

Turn counts into cumulative rates. 2021: 40 of 4,000 is 1.0% at year 1, 80 is 2.0% at year 2, 120 is 3.0% at year 3. 2022: 1.1% then 2.2%. 2023: 1.0%. Now read the shape. Both older vintages double between year 1 and year 2, and the only vintage old enough to show year 3 adds half again, so the multipliers are 2.0x and then 1.5x. Apply them to 2023's 1.0%: 2.0% at year 2 and 3.0% at year 3. Because the loans run three years, that 3.0% is the lifetime rate, 180 defaults on 6,000 loans.

Rs 3 crore covers 109 defaults, a lifetime rate of 1.8%, which the vintage will pass during its second year with a full year still to run. It looks as if the provision was set on observed defaults so far, not on the lifetime expectation. Say that plainly: the provision should rise by about Rs 1.95 crore, and if the 2023 book was written with looser standards than 2021, the curve could steepen; a 20% steeper curve gives 3.6% and about Rs 5.94 crore.

State the limits. Three vintages is a thin sample; the year-2-to-3 multiplier rests on one vintage. Recoveries can take years, so the 55% LGD is itself an estimate. And a book growing 20% a year is a reason to ask whether the lender has been chasing volume, which shows up in vintages before it shows up in the total. The method is still right: same age, same curve, then project.