Provision Coverage Ratio

Provision Coverage Ratio (PCR) measures the proportion of gross NPAs (non-performing assets) that a bank has covered through provisions (funds set aside to absorb potential losses). A higher PCR indicates the bank is better prepared to absorb bad loan losses.

What Is Provision Coverage Ratio?

PCR = (Cumulative Provisions / Gross NPAs) x 100

**Provisions**: funds set aside by banks from profits to cover expected losses on bad loans

**Gross NPAs**: all loans that have been classified as non-performing (more than 90 days overdue)

A PCR of 70% means the bank has provisioned 70% of its gross NPA value, meaning it would lose only 30 cents on each bad loan rupee if the loans were written off entirely.

RBI’s PCR Requirement

RBI requires banks to maintain a minimum PCR of 70% (introduced post the 2008 financial crisis). However, RBI has at times mandated higher PCR levels for banks with elevated NPA concerns.

Why PCR Matters

– Higher PCR means the bank’s balance sheet is cleaner and future earnings impact from NPAs is lower
– Banks with low PCR carry more “hidden” risk; a stress event can require large provisions, reducing profit
– PCR trends over time indicate management’s conservatism in recognising losses
– Higher PCR typically supports a better credit rating for the bank

PCR vs Loan Loss Coverage

The two terms are often used interchangeably, but PCR specifically relates to the regulatory provisioning framework.

Practical Example

Bank A has gross NPAs of Rs 10,000 crore and total provisions of Rs 7,500 crore. PCR = 75%. If all NPAs were written off, the bank would need an additional Rs 2,500 crore from its capital.

Bank B has Rs 10,000 crore gross NPAs but only Rs 5,000 crore provisions (50% PCR). Bank B is more exposed if NPA losses crystallise.

Key Takeaways

– PCR = Cumulative Provisions / Gross NPAs; measures how covered bad loans are with set-aside funds
– RBI mandates a minimum 70% PCR; higher PCR is better
– Higher PCR reduces future earnings volatility as losses from NPAs are already absorbed
– Banks with low PCR face earnings risk when NPAs rise and provisioning requirements increase
– PCR is one of the most watched metrics for assessing bank asset quality conservatism