Definition
Provisioning Coverage on Standard Assets
Standard asset provisioning is the small general provision banks must hold against performing loans, separate from provisions on bad loans.
The RBI requires banks to provide a percentage even on standard (performing) advances, with higher rates for riskier segments like commercial real estate or unsecured consumer credit. This builds a buffer before any default occurs.
Standard-asset provisions are a counter-cyclical tool: the RBI can raise them to cool overheating sectors, as it has for retail and NBFC lending. They sit alongside specific provisions on NPAs and contribute to a bank's overall loss-absorbing cushion.
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.
- 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.
- Risk-Weighted Assets (RWA)Risk-Weighted Assets are a bank's assets weighted according to their credit risk, used as the denominator in capital adequacy calculations.
- Contingency Provision (Banking)A contingency provision is a buffer banks and NBFCs hold against unforeseen risks, such as a macroeconomic shock, beyond provisions for identified bad loans.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.