Term of the Day: Provisioning When a bank gives loan, then it | ECONOMY by VIVEK SINGH

Term of the Day: Provisioning

When a bank gives loan, then it needs to keep in reserves certain funds (which it can’t lend) for the safety of the depositors. This is called provisioning against loan and is expressed as a percentage of loan given. For normal/standard loans the provisioning requirement may be very less but for loans which have turned NPAs, the provisioning requirement may be very high. If RBI says provisioning is 1% that means if a bank gives loan of Rs. 100 then it needs to keep Rs. 1 in a separate reserve fund which it cant lend.

Today there is a news in Indian Express regarding changing the framework on how Provisioning will be calculated. 'Expected Loss of Credit approach' from the current practise 'Incurred Loss approach'. These are operational things and not relevant for your exam.