Definition
Net NPL Coverage (NBFC)
Net NPL coverage for an NBFC is the extent to which provisions cover its non-performing loans, analogous to a bank's provision coverage ratio.
NBFCs following Ind AS classify stage-3 assets as impaired and provide against them under the expected credit loss model. Net NPL coverage shows how much of the gross bad book is provided for, with the uncovered portion representing residual risk to capital.
Because NBFCs use forward-looking ECL rather than the RBI's rule-based provisioning for banks, their coverage can differ in timing and level. Strong coverage signals conservative provisioning and reduces the chance of future earnings shocks from defaults.
Related terms
- 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.
- Non-Banking Financial Company (NBFC)An NBFC is an RBI-registered financial company that lends and invests but cannot accept demand deposits or offer cheque facilities like a bank.
- 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.
- Portfolio at Risk (PAR)Portfolio at Risk is the share of a microfinance or NBFC loan book that is overdue beyond a set number of days, a key asset-quality metric.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.