Definition
Loan Loss Coverage Ratio
The loan loss coverage ratio compares a bank's loan-loss reserves to its non-performing loans, indicating how well reserves protect against bad-loan losses.
Closely related to the provision coverage ratio, it measures the cushion of accumulated provisions against the stock of bad loans. A ratio above one means reserves exceed recognised NPAs, leaving the bank well protected.
A high loan loss coverage ratio signals conservative provisioning and reduces the risk that future defaults will surprise the P&L. Analysts read it with the net NPA ratio and trends in credit cost to judge how much hidden asset-quality risk remains.
Related terms
- Gross NPA Ratio (GNPA)The Gross NPA ratio is the share of a bank's total advances that have turned into non-performing assets, before deducting provisions held against them.
- 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.