Under the IFRS 9 Expected Credit Loss (ECL) framework, financial institutions are required to adopt a forward-looking approach to credit impairment. One of the most critical aspects of this model is determining whether a Significant Increase in Credit Risk (SICR) has occurred since the initial recognition of a financial asset. This assessment dictates whether an exposure remains in Stage 1, where only a 12-month ECL is recognized, or moves into Stage 2, where lifetime ECL must be booked. Because this transition has a direct impact on the level of provisions a bank must hold, the ability to correctly evaluate SICR is central to the accuracy and credibility of the entire ECL framework.

A key component of the SICR assessment is the origination rating, which represents the borrower’s credit quality at the time the asset was first recognized. This original rating acts as the baseline against which all future changes in credit risk are measured. IFRS 9 emphasizes the need to evaluate not just the current level of credit risk but the change in credit risk relative to initial recognition. Without knowing where the borrower started, it becomes impossible to determine the extent of deterioration or improvement in their credit profile. The origination rating therefore forms the foundation of the relative risk assessment that IFRS 9 requires.

The importance of the origination rating becomes particularly clear when two borrowers exhibit the same credit rating today. If one borrower began with a stronger, investment-grade rating and has subsequently experienced a noticeable decline, while the other borrower began at a weaker point and has remained stable, the two would appear identical in a snapshot of current ratings. However, their risk trajectories are entirely different. Only by referencing the origination rating can a bank identify that the first borrower has experienced a significant increase in credit risk, whereas the second has not. This distinction ensures the SICR calculation reflects genuine deterioration rather than simply comparing isolated risk levels at a point in time.

In practice, many institutions determine SICR by monitoring notch movements or transitions between internal rating grades. Stronger borrowers may be able to absorb larger downgrades before triggering SICR, while weaker borrowers may require only a small deterioration for the same result. This graduated approach reflects the principle-based nature of IFRS 9, which recognizes that the sensitivity to credit deterioration differs across risk profiles. The origination rating therefore enables a more nuanced and risk-aligned method of identifying SICR, improving both accuracy and consistency.

Although the origination rating is central to the SICR assessment, it is supported by other qualitative and quantitative factors, such as past-due behaviour, watchlist classification, signs of financial difficulty, or external market conditions. These indicators help strengthen the overall credit risk evaluation and ensure that exposures showing significant distress are flagged even if rating data has not yet fully captured the risk. Nevertheless, the origination rating remains the anchor point for assessing relative deterioration, and its absence can create significant weaknesses in the staging process.

Many challenges arise when origination ratings are not consistently captured or stored. Missing historical ratings, incomplete data migrations, and over-reliance on current ratings are common issues that lead to inappropriate staging outcomes. Without an accurate record of the borrower’s starting position, banks may underestimate or overestimate credit deterioration, resulting in misaligned ECL provisions. Strengthening the capture and maintenance of origination ratings is therefore essential for ensuring that the SICR process is both reliable and compliant.

Ultimately, the origination rating plays a pivotal role in the ECL framework by enabling banks to understand how credit risk evolves over time rather than evaluating it in isolation. It provides the context, the comparison point, and the continuity necessary to apply IFRS 9 correctly and meaningfully. By anchoring SICR assessments to the origination rating, institutions can produce more accurate provisions, reduce staging volatility, and reinforce the integrity of their credit risk framework.