Following the comments on indeterminate, it is timely to introduce some shorthand notation that will help in discussions that follow.
The issue is the point-in-time default definition. Your default definition should in the first instance produce a decision at every point in time as to whether the account is in default or not. The set of possible points in time is determined by the time granularity of your data systems. A typical situation would be monthly data for CC with default flagged for >=90DPD assuming the outstanding balance exceeds some materiality parameter(s).
But why point-in-time default definition? Because this is not the final default story; the re-ageing logic still needs to be superimposed. Re-ageing involves an extension of the point-in-time default definition to the concept of a default episode, which has temporal extent i.e. it is a time window having a start date and an end date. Today’s post, however, covers only the point-in-time default issue, and the qualifier “point-in-time” will be left out to avoid clutter.
Default history for any particular account can be summarised by the string of consecutive default statuses: for example GGGGGGIIIBBG shows the account was ‘good’ for the first 6 months, ‘indeterminate’ for the following three months and then ‘bad’ for two months but then ‘good’ again in the 12th month. These 12 months could be the first 12 months since the account opened, if you are doing longitudinal analysis, or it could be the 12 months of a cross sectional analysis, in which case it might represent something like MOB 33-44.
The definition details of ‘bad’ and ‘good’ will be particular to each institution and product, but status codes that I have found useful include:
- B = Bad, i.e. point-in-time in default
- I = Indeterminate. Optional status, not all situations require that one should need to distinguish these from G and B i.e. ask the question: how does ‘I’ differ from ‘G’?
- R = in recoveries
- C = in collections
- W = has been written off
- G = Good, i.e. not bad nor any other status with a higher precedence
- U = Undrawn. This can apply to loan accounts that have been set-up and are open on the books, but where the capital has not been drawn down yet. For HLs there can be a few months delay if there are hold-ups in transfer. In the meantime, they appear as accounts with zero balance outstanding. This only applies when this situation happens at the beginning of an account’s history, i.e. not for zero balance accounts that can occur later. Undrawn does not apply to some products such as CC because they are only activated when the first transaction is made.
- D = Dormant. It may be useful to identify accounts that appear to be dormant, i.e. have returned to a zero balance and there is no customer initiated activity for a long time. Because of Basel treatment, but also for commercial reasons, the bank may want to identify these and do something about them.