A Stage 3 credit exposure is a loan or other financial asset that is credit-impaired under IFRS 9: one or more events have occurred that have a detrimental effect on the cash flows the lender expects to receive. Evidence includes significant financial difficulty of the borrower, a default or serious arrears, a concession granted because of the borrower's difficulties, or likely bankruptcy. The standard presumes default no later than 90 days past due unless the lender can justify a later point. In practice banks align Stage 3 closely with the regulatory definitions of default and non-performing exposure.
As for a Stage 2 credit exposure, the allowance equals lifetime expected credit loss, but it is usually estimated loan by loan from expected recoveries and collateral. Interest income is recognised on the net carrying amount, after deducting the allowance. Amounts with no realistic prospect of recovery are removed under the lender's write-off policy.