What is provision Coverage Ratio?

Answer 1

Businesses lay aside funds in case they anticipate losses or unanticipated bad loans. Indian banks are required to set up a provision fund to cover their anticipated bad loans; this percentage measures provision coverage. Banks set aside monies from their own resources, primarily revenues, for problematic loans. Additionally, the provision coverage ratio (PCR) must be disclosed by banks in their annual financial statements.

The initial PCR benchmark set by RBI is 70%. Therefore, the bank must reserve 70% of its loans as a temporary cushion. For banks, a higher PCR is preferable because it helps when NPAs increase more quickly. A PCR of at least 70% is ideal.

One can determine how susceptible the bank is to NPAs by looking at the PCR. RBI has also recommended banks to use their extra provisions as a buffer for countercyclical provisioning. The RBI must provide the banks specific clearance before they can use these money

In order to be useful during a downturn, the RBI also wants banks to create a "Dynamic Provisioning Account" during their prosperous years.

Reference:-

Quantsapp

Answer 2

Provisioning Coverage Ratio (PCR) is the ratio of provisions held to gross non-performing assets.