Recovery Rate

Risk

Quick Definition

Recovery Rate is the percentage of the loan or investment amount that a lender or investor is able to recover after a borrower defaults.

Detailed Explanation

Recovery Rate measures how much money is recovered from a defaulted loan through repayments, collateral sale, or legal proceedings. It is a key metric in credit risk analysis and helps lenders estimate potential losses.

In India, recovery processes are governed by frameworks set by the Reserve Bank of India and laws like the Insolvency and Bankruptcy Code (IBC).

Formula

👉 Recovery Rate = (Amount Recovered ÷ Total Loan Amount) × 100

Why Recovery Rate Matters

  • Helps assess credit risk
  • Determines potential loss (Loss Given Default)
  • Important for banks and investors

Factors Affecting Recovery Rate

  • Value of collateral
  • Legal recovery process
  • Borrower’s financial condition
  • Economic environment

Recovery Rate vs Loss Given Default (LGD)

  • Recovery Rate: % recovered
  • LGD: % lost (100% – Recovery Rate)

Example

"If a bank recovers ₹40,000 from a ₹1 lakh defaulted loan: 👉 Recovery Rate = 40%"

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