Provision Coverage Ratio (PCR)

How well a bank has braced for bad loans

When a loan turns bad, a non-performing asset (NPA), a bank must set aside money from profits to absorb the expected loss; this set-aside is a provision. The Provision Coverage Ratio (PCR) measures what portion of total bad loans the bank has already provided for: Total Provisions ÷ Gross NPAs, as a percentage.

A PCR of 75% means the bank has set aside enough to cover three-quarters of its bad loans. The higher the PCR, the stronger the buffer, and the smaller the future hit to profits if those loans are eventually written off.

Why higher is safer

A high PCR signals prudence and resilience. If a bank has heavily provided against its NPAs, future bad news is largely absorbed; recoveries can even flow back as profit (provision write-backs). A low PCR means the bank is under-provided, lurking losses could suddenly dent earnings and erode capital when reality bites.

The RBI watches PCR closely and has at times pushed banks toward higher coverage, particularly after India's bad-loan crisis, when many lenders were dangerously under-provided. Leading Indian banks now typically maintain PCRs of 70% or higher, a marked improvement from the stressed years.

Reading it as a bank investor

PCR is one of a handful of essential metrics for analysing a bank, alongside gross and net NPA ratios, capital adequacy, ROA and net interest margin. The relationship is intuitive: gross NPA shows how much has gone bad; PCR shows how much of that the bank has already absorbed; and net NPA (the uncovered portion) shows the residual risk still sitting on the balance sheet.

A bank with high gross NPAs but a high PCR may be in better shape than it first appears, the damage is recognised and cushioned. One with low PCR is carrying hidden risk. For investors, a healthy and rising PCR signals conservative, well-managed risk and cleaner future earnings, which is why it sits at the centre of any serious assessment of Indian bank stocks.