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.
In agreement with the prudential norms for loans & advances, provisioning should be made by the banks and financial institutions on each of their non-performing assets (NPA) based on asset quality. The following article explains the definition of non-performing assets (NPAs), and basis on which accounts are classified into Special Mention Accounts (SMA) /sub-standard Assets, Doubtful assets, and Loss Assets. Income recognition and provisioning requirement are specified in the article.