Loan loss provisioning
Also called: Provisioning · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
Loan-loss provisioning means a bank sets aside part of its profits to cover losses it expects on its loans. The provision rate rises as a loan's classification worsens. This means that when loans go bad, the loss is already absorbed and does not suddenly wipe out the bank's capital. RBI's rates are:
- Standard: 0.25-1% (general 0.40%)
- Sub-standard: 15% (unsecured exposures 25%)
- Doubtful, secured part: D1 25%, D2 40%, D3 100%
- Doubtful, unsecured part: 100%
- Loss: 100%
Example
A bank has Gross NPA of Rs 100 crore and has made provisions of Rs 75 crore.
- Net NPA = Gross NPA − provisions = Rs 25 crore
- Provisioning Coverage Ratio (PCR) = provisions ÷ Gross NPA = 75%
Don't confuse with
- Loan write-off: removes a fully provided loan from the balance sheet, though the borrower still owes the money. Provisioning only sets money aside while the loan stays on the books.
Related concepts
- Standard asset
- Special Mention Account
- Non-Performing Asset
- Sub-standard asset
- Doubtful asset
- Loss asset
- Gross and net NPA
- Provisioning Coverage Ratio
- Stressed assets
- Expected Credit Loss provisioning