Provisioning

Provisioning is money a bank sets aside from its profit to cover the expected loss on a bad loan — taken now, the moment a loan deteriorates, long before any actual write-off.

This is the concept that explains why one large account going bad can wreck a quarter's results. People assume a bank only "loses" money when a loan is finally written off — but the hit lands much earlier, through provisioning. The day a loan is classified worse, the bank must charge a provision against its P&L. That provision is a real reduction in profit even though no cash has left and the loan might still be partly recovered. For anyone reading bank results, provisioning is why "the bank made an operating profit but reported a net loss" is a sentence that actually makes sense.

A bank has a healthy quarter on its core spread: operating profit of ₹500 cr. Then one large ₹1,000 cr loan is classified doubtful, requiring a 40% provision:

• Provision charged: 40% × ₹1,000 cr = ₹400 cr, straight off the P&L.
• Net profit: ₹500 cr − ₹400 cr = ₹100 cr — an 80% collapse, from one account.

No money has actually been written off yet; the bank is simply being forced to admit the likely loss up front. This is also why banks "front-load" provisions in bad years and why provisioning is the single most volatile line in a bank's results.

The size of the provision is set by where the loan sits on the asset-classification ladder. Provisions come straight off PPOP to produce net profit — this is the marquee link: a bad loan eats the profit the spread worked to build. Provisions also create the gap between gross and net NPA, and how much of its bad loans a bank has already provided for is captured by the Provision Coverage Ratio. Expressed as a share of the loan book, the same provisions become the bank's credit cost; and once a loan is fully provided, it heads for the exit — write-off and recovery.