Provisioning Coverage on Standard Assets

A cushion against good loans

Banks must set aside money against loans that may go bad — that much is intuitive. Less obvious is that the RBI also requires a small general provision against loans that are perfectly healthy. These performing loans are called standard assets, and the buffer held against them is the standard asset provision. The logic is prudence: even a book of good loans contains some that will eventually sour, so a modest cushion against the *whole* performing book protects the bank before any specific loan actually turns bad. This is entirely separate from the larger, specific provisions held against loans already classified as non-performing.

The RBI's rates

The default provision is 0.40% of the outstanding amount for ordinary standard advances. But the RBI varies the rate by sector to manage risk:

- Agriculture and SME loans: a lower 0.25%. - Commercial real estate (CRE): a higher 1.00%. - CRE - residential housing: 0.75%. - Teaser-rate housing loans: a steep 2.00% (reverting to 0.40% a year after the rate resets, if the loan is still standard).

A macroprudential tool

The higher rates on commercial real estate and teaser loans are deliberate. By forcing banks to hold more capital against lending to overheating or risky segments, the RBI makes that lending more expensive and cools the sector before a bubble forms — a macroprudential lever as much as an accounting rule.

A simple example

Consider ₹100 crore of loans. If it is ordinary corporate lending, the bank holds ₹40 lakh (0.40%) in standard-asset provisions. If the same ₹100 crore is commercial real estate, it must hold ₹1 crore (1.00%) — four times the cushion for the same amount lent.

Why investors should care. When analysing a bank, standard-asset provisioning tells you how conservatively it is buffered and where its loan book is concentrated. A bank skewed towards CRE and teaser loans carries higher mandated provisions, signalling riskier exposure. Reading these provisions alongside NPA coverage gives a fuller picture of how well a lender is protected against losses it has not yet recognised.