Definition
Floating Provisions
Floating provisions are general buffers banks set aside over and above specific loan-loss provisions, usable against future contingencies with regulatory approval.
Unlike specific provisions tied to identified bad loans, floating provisions are a discretionary cushion built in good times. The RBI restricts their use, generally allowing them to be drawn down only for extraordinary situations or netted off against gross NPAs with permission.
Floating provisions strengthen a bank's resilience and can lift its effective provision coverage ratio. Building them during strong years is a sign of conservative, counter-cyclical management, since they provide a reserve to absorb losses when the credit cycle turns.
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.
- Credit CostCredit 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.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.