Loss given default

The share of an exposure a lender loses if the borrower defaults, after recoveries from collateral, guarantees and the insolvency process: one minus the recovery rate. Together with the probability of default and the exposure at default, it gives the expected loss.

Take a ₹200 crore loan expected to recover 35% after a default. Its loss given default is 65%. With a 3% annual probability of default, the expected loss is ₹200 crore times 3% times 65%, or ₹3.9 crore a year, and that's the minimum the lending margin has to cover before any profit.

Recovery depends on seniority, security and the legal system. Secured lenders recover more than unsecured ones, and in India recoveries through the insolvency code have often been well below the claims admitted, after years of delay. Delay matters as much as the percentage, because a recovery received in four years is worth much less today.

Default is an event. Loss is a number.