Provisioning Coverage Ratio

Also called: PCR · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

Provisioning Coverage Ratio (PCR) is the share of a bank's bad loans (Gross NPAs) that the bank has already covered with money set aside from its profits.

PCR = Provisions held ÷ Gross NPA × 100

It shows how ready a bank is to absorb losses on its bad loans. A high PCR means most of the loss has already been paid for. A future default then will not suddenly wipe out the bank's capital.

Explanation

How it works

• NPA (Non-Performing Asset) is a loan on which interest or a principal instalment stays overdue for more than 90 days [1].
• Provision is money the bank takes from its profits and keeps aside to meet the expected loss on such a loan.
• Gross NPA (GNPA) is the total of all bad loans.
• Net NPA (NNPA) = Gross NPA − provisions held. This is the part of bad loans that is still not covered.
• PCR and NNPA are two sides of the same coin:
• PCR is the covered share.
• NNPA is the uncovered amount.
• So NNPA = GNPA × (1 − PCR).

Worked example (from our notes):

Item	Amount
Gross NPA	Rs 100 crore
Provisions held	Rs 75 crore
Net NPA (100 − 75)	Rs 25 crore
PCR (75 ÷ 100 × 100)	75%

Where the provisions come from: IRAC norms

• IRAC (Income Recognition and Asset Classification) norms are RBI's rules on how each loan is labelled and how much must be set aside against it.
• The worse the label, the higher the provision. So the mix of NPAs decides the PCR.

Category	Provision (current)
Sub-standard (NPA up to 12 months)	15%; unsecured exposures 25%
Doubtful, secured part	D1 25% · D2 40% · D3 100%
Doubtful, unsecured part	100%
Loss	100% [2]

• Worked example for one loan:
• A Rs 100 crore loan is in D2, and the security is worth Rs 60 crore.
• The secured part needs 40% × 60 = Rs 24 crore.
• The unsecured part needs 100% × 40 = Rs 40 crore.
• Total provision = Rs 64 crore, so the PCR on this loan = 64%.

What makes PCR rise or fall

PCR rises when:

• Loans age. A bad loan moves from sub-standard to D1, D2, D3, so its required provision climbs from 15% towards 100%.
• Banks provide more than the minimum. This happens when profits are good.
• Old bad loans are recovered or resolved and few new ones come in.

PCR falls when:

• Many fresh NPAs appear at once.
• A new NPA starts as sub-standard with only 15% provision.

• So GNPA jumps faster than provisions, and the ratio drops.

• Profits are too weak for the bank to set enough aside.

Link to capital (NCERT, Net Worth = Assets − Liabilities):

• Every rupee provided is a rupee taken out of profit, and so out of the bank's net worth.
• A high PCR means this hit has already been taken.
• A low PCR means the hit is still waiting to land on capital.

In India

• Who sets the rules: the RBI, through its prudential norms (safety rules for banks) on income recognition, asset classification and provisioning [1][2].
• Benchmark: RBI earlier used a 70% PCR benchmark.
• Tighter rules over time:
• RBI's July 2011 master circular set 10% for sub-standard assets and 20-100% for the secured part of doubtful assets [1].

• Today the figures are 15% and 25-100%. Higher rates push PCR up.

• How PCR has moved:

• All scheduled commercial banks (SCBs): 48.3% (March 2018) → 52.4% (September 2018) → 60.6% (March 2019) [5]

• Public sector banks (PSBs): from 46.0% to 89.9% (December 2022) [6]

• Why it rose:

• The Asset Quality Review (2015) forced banks to recognise hidden bad loans [4].
• The Government's 4R strategy (Recognise, Resolve, Recapitalise, Reform) and the IBC, 2016 followed [4].

• Banks first had to provide heavily. Then GNPA fell from about 11.2% (March 2018) to 2.15% (end-September 2025, provisional) [3].

• What is coming: RBI proposed an Expected Credit Loss (ECL) approach "subject to a prudential floor" on 1 October 2025, with a glide-path (a gradual phase-in) [7].

• Under ECL, banks set aside money for likely losses from the day a loan is made.
• This should make provisions steadier and PCR less jumpy.

Don't confuse with

• Net NPA: an amount (GNPA − provisions), not a ratio of cover. When provisions rise, PCR goes up but NNPA goes down.
• GNPA ratio: GNPA ÷ gross advances (total loans). It measures how much of the loan book is bad. PCR measures how well that bad part is covered. A bank can have a low GNPA ratio and still have a low PCR.
• Capital Adequacy Ratio (Basel III): capital held against all risk-weighted assets. PCR is money set aside against only the loans that have already turned bad.
• Standard-asset provision (0.25-1%): kept even on healthy loans. PCR is calculated only against Gross NPAs.

Prelims Hooks

• PCR = Provisions ÷ Gross NPA × 100. Net NPA = Gross NPA − provisions.
• Trap: a higher PCR means a lower Net NPA for the same Gross NPA.
• RBI earlier used a 70% PCR benchmark.
• SCB PCR: 48.3% (March 2018) → 60.6% (March 2019) [5]. PSB PCR: 46.0% → 89.9% (December 2022) [6].
• Provisioning ladder: sub-standard 15% (unsecured 25%). Doubtful secured 25% / 40% / 100% (D1/D2/D3). Doubtful unsecured 100% at every stage. Loss 100% [2].
• A fresh wave of NPAs usually lowers PCR at first, because new NPAs carry only a 15% provision.

Mains Points

• PCR is a shock absorber for financial stability.
• A high PCR means past losses are already taken out of profits.
• So bank capital is safer, depositors are protected, and banks can lend again.

• This is why PSB PCR rising to 89.9% (December 2022) [6] came alongside the clean-up of the twin balance-sheet problem (when companies and banks are both under debt stress at the same time).

• Trade-off: high provisions vs profits and credit.

• Heavy provisioning eats into profit and capital. This can lead to recapitalisation (fresh capital from the Government) with a fiscal cost, and to slower lending in the short run.

• A low PCR, on the other hand, hides future losses and can signal evergreening (paying a small amount to make a bad loan look healthy).

• Procyclicality and ECL.

• Under the incurred-loss model, provisions jump only after defaults, and defaults bunch up in downturns. So PCR swings with the cycle.
• The proposed ECL with a prudential floor (October 2025) [7] spreads provisioning over the life of a loan. This gives steadier coverage, but banks need good data and must bear a one-time capital hit.

Related concepts

• Standard asset
• Special Mention Account
• Non-Performing Asset
• Sub-standard asset
• Doubtful asset
• Loss asset
• Gross and net NPA
• Loan loss provisioning
• Stressed assets
• Expected Credit Loss provisioning

Read more

• Recognising bad loans: SMA, NPA classification and provisioning (IRAC norms)