Credit Cost
Provisions as a % of loans — the per-rupee cost of bad lending that eats profit.
Why you care
GNPA tells you the stock of bad loans; credit cost tells you the flow — how much profit the bank had to set aside against bad lending this year, per rupee of loans. It's the asset-quality number analysts quote every quarter, usually in basis points.
Run the numbers
₹1,200 cr of provisions on a ₹1,00,000 cr book = 1.2%, or 120 bps of credit cost (illustrative). Don't confuse it with the slippage ratio — that's how many fresh loans went bad; credit cost is the money set aside against them.
Where this goes
Credit cost is the provision charge that comes straight off PPOP on the way to net profit. Because it's measured against assets, a 1.2% credit cost knocks roughly 1.2% off pre-tax ROA — which is why it's watched so closely.
Why you care
Credit cost is the provision charge a bank takes in a period, expressed as a percentage of its loan book. If provisioning is the rupee amount set aside against bad loans, credit cost is that amount as a rate — the per-rupee, per-year cost of lending badly.
Here's the distinction that makes it useful. Gross NPA is a stock: the total pile of bad loans sitting on the books, accumulated over years. Credit cost is a flow: the fresh pain the bank absorbed this year alone. A bank can have a scary-looking GNPA that's slowly shrinking (low credit cost — the worst is behind it). Or it can have a modest GNPA that's about to explode (rising credit cost — the pain is just starting). Analysts quote credit cost every quarter, in basis points, because it's the cleanest read on the direction of asset quality and it feeds straight into the profit line.
One more pair to keep straight: credit cost versus the slippage ratio. Slippage is how many standard loans turned NPA this year (the inflow of bad loans); credit cost is the money provided against them. High slippage this quarter tends to become high credit cost over the next few, as those fresh NPAs age down the classification ladder and demand bigger provisions.
Run the numbers
A bank with a ₹1,00,000 cr loan book takes ₹1,200 cr of provisions during the year (illustrative):
- Credit cost = 1,200 / 1,00,000 = 1.2% = 120 bps
What that means in practice: for every ₹100 the bank has lent, ₹1.20 of profit was eaten by bad-loan provisions this year. Now connect it to the bottom line. The bank earns roughly a 1.2% ROA in a good year — so a credit cost of 1.2% is not a footnote, it's the difference between a good year and a wiped-out one. In a benign year credit cost might run 0.4–0.6%; in a stress year (a corporate cycle turning, an unsecured book souring) it can spike to 2%+ and swallow the whole return. This single number is why "the quarter was fine except for provisions" is the most common line in Indian bank results.
Where this goes
Credit cost is where asset quality meets the P&L. It's the provision charge that comes off PPOP to produce net profit — usually the largest and most volatile line in that bridge. And because it's expressed against the loan book, it maps almost one-for-one onto the drag on ROA: a bank running 1.2% credit cost is handing back most of a year's return on assets. Watch it against gross NPA — the stock and the flow together tell you whether the bad-loan story is getting better or worse.