spot_img

Provision Coverage Ratio in detail

To tackle the NPA or bad assets problem in the banking sector, RBI has designed several mechanisms. Among these, the most important one is the Provisioning norms which is a part of RBI’s prudential regulation.

In banking terms, 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.

The provisioning coverage ratio is the percentage of bad assets that the bank has to provide for from their own funds (profit) for covering the prospective losses due to bad loans.

Earlier RBI had prescribed a bench mark Provisioning Coverage Ratio (PCR) of 70 percent of gross NPAs as a macro-prudential measure. Though, there is no such prescription now, it is good for the banks to provide 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 fast rate.

A high PCR ratio (ideally above 70%) means most asset quality issues have been taken care of and the bank is not vulnerable.

HOW TO MAKE PROVISIONING?

Provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained non-performing and the availability of security and the realisable value thereof.

For example:- if the provisioning coverage ratio is kept at 60% for a particular category of bad loans, banks have to keep aside funds equivalent to 60% of those bad assets out of their profits.

PROVISIONING REQUIREMENT FOR VARIOUS ASSETS ?

The provisioning coverage ratio required to be maintained differs according to the quality of the assets. It is mentioned below-

ASSET TYPE PROVISIONING REQUIREMENT
Loss Assets Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 % of the outstanding should be provided for.
Doubtful Assets
  • (i) Unsecured portion: 100 % of the extent to which the advance is not covered by the realisable value of the security.
  • (ii) Secured portion: rates ranging from 25 % to 100 % of the secured portion depending upon the period for which the asset has remained doubtful. (25% for upto one year, 40% for 1-3 years and 100% for more than 3 years).
Substandard Assets A general provision of 15 % on total outstanding should be made.
Standard Assets Provisioning from 0.25% for MSME loans to 12.4% for restructured housing sector teaser loans.

 

Thus, in simple words, Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross non-performing assets and indicates the extent of funds a bank has kept aside to cover loan losses.

Also Like:

LEAVE A REPLY

Please enter your comment!
Please enter your name here

🤩 🥳 SPECIAL MAKAR SANKRANTI OFFER 🥳 🤩spot_img

POPULAR POST

RELATED ARTICLES

Provision Coverage Ratio in detail

To tackle the NPA or bad assets problem in the banking sector, RBI has designed several mechanisms. Among these, the most important one is...

What is FEMA Act 1999 ?

Foreign Exchange Management Act, 1999 (FEMA) came into force by an act of Parliament & came into effect from 1st June, 2000. FEMA Act was...

Yield to Maturity ( YTM )

YTM is nothing but the internal rate of return (IRR) of a bond. It is also known as redemption yield. Yield to maturity is the...

Negative Lien in detail

WHAT IS LIEN ? A lien is a right of a person to retain a property which is in his ownership or possession till such...