WHAT IS PROVISIONING COVERAGE RATIO?

In banking lexicon, provisioning means to set aside or provide some funds to cover up losses if things go wrong and some of their loans turn into bad assets.

Provisioning Coverage Ratio (PCR) refers to the prescribed percentage of funds to be set aside by the banks for covering the prospective losses due to bad loans. 

Earlier there was a bench mark Provisioning Coverage Ratio (PCR) of 70 percent of gross NPAs was prescribed by RBI, as a macro-prudential measure. 

Though, there is no such prescription now, it is good for the banks to go for higher PCR when they are making good profits, as building up ‘provisioning buffer’ is useful when non-performing assets (NPA) of a bank rise at a faster clip

The Reserve Bank advised the banks to segregate the surplus of the provision under PCR vis-a-vis as required as per prudential norms into an account styled as “countercyclical provisioning buffer”. 

This buffer is allowed to be used by the banks for making specific provisions whenever needed, of course, with the prior approval of RBI.

Slippage Ratio: 

The slippage ratio is the rate at which good loans are turning bad; the credit cost is the amount a bank expects to lose due to credit risks .

Gross Non-Performing Assets (GNPA)

Gross NPA is the summation of all loan assets that are classified as NPA as per RBI guidelines. When the NPA occurs, it is not just an interest income loss to the bank, but a principal loss as well. 

for example:  if a bank has lent Rs.100 Crores to a company with an outstanding loan amount of 80 Crores, then the bank would lose these 80 Crores along with the future interest payments as well when the company does not repay back.

Gross NPA Ratio 

It is the ratio of total gross NPA to total advances (loans) of the bank.

Formula:

Net non-performing assets = Gross NPAs – Provisions.