The worked question on this page is original educational practice. It is not represented as a question from an official previous-year examination paper.
01 / UNDERSTANDING
Review the question
Write an original expected-loss exercise that includes recovery information and a distractor assuming total loss. Give recovery information so assuming total loss becomes an identifiable error. An original checkpoint is: What is the simplified expected loss from the stated inputs? Supported answer: 8 units. Explain the decisive fact, then alter one condition and solve again. This is an original practice method, not a claim that the question appeared in an official past paper.
02 / UNDERSTANDING
The concept in context
Expected loss is an average under assumptions, not a prediction of the exact loss on one account or a complete regulatory-capital calculation. A useful study check is to identify exposure, default probability and loss severity, then separate expected and realised loss statements. Explain why the method fits the stated facts before applying it to a changed situation.
03 / UNDERSTANDING
A worked learning case
A fictional portfolio has exposure of 1,000, an assumed one-period default probability of 2% and loss given default of 40%. Multiplying these inputs gives an expected loss of 8. An individual loan may still repay fully or suffer a different realised loss. The calculation summarises an assumed risk distribution rather than a guaranteed outcome.
ORIGINAL EDUCATIONAL PRACTICE
Try it before you check.
What is the simplified expected loss from the stated inputs?
Show the answer and reasoning
8 units.
The calculation is 1,000 times 0.02 times 0.40, equal to 8. Multiplying exposure only by default probability would give 20 and implicitly assume complete loss on default. The stated recovery assumption reduces the loss-given-default proportion to 40%, while uncertainty about actual individual outcomes remains.
Two traps to watch for.
- Ignoring recovery when translating default probability into expected loss.
- Treating expected loss as an exact account-level forecast.
YOUR TOPIC-SPECIFIC LEARNING MAP
Learn from the attempt
Identify exposure, default probability and loss severity.
Keep percentages in consistent decimal form.
Separate expected and realised loss statements.
Explain the idea, apply it to a new situation, then check what changed in your reasoning.
BANKERS TUTORIAL · SOURCE NOTES
Keep the source alongside your notes.
Official links provide subject context and authoritative reference material. This guide’s explanation, scenario and question are original Bankers Tutorial learning content.
- www.rbi.org.in https://www.rbi.org.in/scripts/DataDefinition.aspx
- www.rbi.org.in https://www.rbi.org.in/commonperson/english/Scripts/FAQs.aspx
- www.rbi.org.in https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=708
For RBI preparation, check the current official notice before relying on changing dates, rules or examination requirements.
