Under the FSA model, the flow of dynamic provisions is calculated using the stock of loans outstanding at the beginning of each year and is set as under: Dynamic provisions (to be made during the year) = Long term loan loss estimate – Incremental specific provisions ---- (3) I have taken the following example from the RBI’s discussion paper:  BIS central bankers’ speeches  5  Key assumptions in the example are: i.  Ten-year economic cycle,  ii.
An average long-run loss rate of 0.8% of loans, an unchanged mix of loans within the portfolio, and  iii. An average risk weight of 60% for the loans. It is also assumed that, mainly through the application of a variable scalar approach to Probability of Default (PDs), this risk weight does not itself vary with the cycle.