What is meant by provision in NPA?

NPA Provisioning Keeping aside the technical definition, provisioning means an amount that the banks set aside from their profits or income in a particular quarter for non-performing assets; such assets that may turn into losses in the future.

What is provisions for non-performing loans?

Booking a provision means that the bank recognises a loss on the loan ahead of time. Banks use their capital to absorb these losses: by booking a provision the bank takes a loss and hence reduces its capital by the amount of money that it will not be able to collect from the client.

What is asset provisioning?

Under provisioning, banks have to set aside or provide funds to a prescribed percentage of their bad assets. The percentage of bad asset that has to be ‘provided for’ is called provisioning coverage ratio.

What are provisions in accounting?

Provisions essentially refer to any funds set aside from company profits for this express purpose. To qualify as a provision in accounting, the funds must be for a specific purpose, such as to offset the decrease in an asset’s value.

What is a loan provision?

Key Takeaways. A loan loss provision is an income statement expense set aside to allow for uncollected loans and loan payments. Banks are required to account for potential loan defaults and expenses to ensure they are presenting an accurate assessment of their overall financial health.

Why is provision needed?

Provisions are important because they account for certain company expenses, and payments for them, in the same year. This makes the company’s financial statements more accurate. Because the expense is ‘probable’, the amount set aside is expected to be spent.

What is provision coverage?

A Provisioning Coverage Ratio or PCR is the percentage of funds that a bank sets aside for losses due to bad debts. A high PCR can be beneficial to banks to buffer themselves against losses if the NPAs start increasing faster. Provision Coverage Ratio = Total provisions / Gross NPAs.