Definition
Credit Cost
Credit cost is the provisioning a bank or NBFC books for bad and doubtful loans during a period, usually expressed as a percentage of average advances.
Credit cost is the income-statement counterpart of asset quality: it is the amount charged to the profit and loss account to cover expected loan losses. It rises when slippages climb and falls when the loan book is clean or recoveries flow in.
For Indian lenders, normalised credit cost is a key input to earnings forecasts. Under the Ind AS expected-credit-loss model, NBFCs provision based on forward-looking estimates, which can make credit cost more volatile than the RBI's rule-based provisioning followed by banks.
Related terms
- Net NPA RatioThe Net NPA ratio is gross non-performing assets minus provisions held against them, expressed as a percentage of net advances.
- Provision Coverage Ratio (PCR)The Provision Coverage Ratio is the proportion of a bank's gross non-performing assets covered by provisions, showing how well it is buffered against loan losses.
- Slippage RatioThe slippage ratio measures fresh non-performing assets added during a period as a percentage of standard advances at the start of that period.
- Expected Credit Loss (ECL)Expected Credit Loss is a forward-looking provisioning model under Ind AS 109 that estimates likely loan losses based on probability of default, not just incurred defaults.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.