Hey,
The process of availing a loan requires deliberation from the customer and the financial institution. Both the parties want to protect their interests and get a favourable outcome. I will tell you what is provisioning in banking and how it might impact your loan process below.
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Banks expose themselves to credit risk if the borrower is unable to pay back the loan amount. To tackle the problem of bad assets and credit loss, the Reserve Bank of India has employed several mechanisms, provisioning is one of them.
Banks in India have to set aside funds for a percentage of their bad assets. This means that the bank sets aside a prescribed amount of money from their profit to compensate for probable loss.
Keep reading what is provision in banking.The aim of provisioning is to cover risk. If the browser ends up paying the loan amount, the provisioning mechanism is not used. The provisioning ratio depends on the period of classification. Experts deduce if the recovery of loan amount is negligible, expected percentage etc.
Eg. For zero recovery loan accounts, the provisioning is kept aside at 100%. For expected recovery, the provisioning ratio is decided accordingly. Provisioning is classified on the basis of risk assessment and age of the loan. According to RBI guidelines, the provisioning ratio for banks ranges from 2.5% to 100%.
Take a look at the table to know more.
Asset |
Provisioning % |
sub-standard asset |
2.5 to 4% |
doubtful assets |
10 to 20%, |
loss assets |
30, 50 and 100% |
loan balance outstanding |
100% |
This is all from my end on what is provisioning in banking.
Read more: What is the NPA Meaning in Banking? Sub standard assets meaning? What are the principles of lending in banking?Your Feedback Matters! How was this Answer?
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Authors Of The Question
What is provisioning in banking?
Kritika
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2 Year
2022-10-21T12:59:59+00:00 2022-10-21T13:00:00+00:00Comment
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