What is provisioning in lending?
The amount set aside against expected loss.
A charge to the profit and loss account against loans that may not be recovered in full, at rates that step up as an account moves through the classification stages. It is not a cash movement — it is an acknowledgement, made in the accounts, that some of what is on the balance sheet will not arrive.
How is provisioning calculated?
A percentage of the outstanding, fixed by the classification. For an NBFC: 0.25% on a standard asset in the Base Layer and 0.40% in the Middle, 10% of the whole outstanding once it is sub-standard, and — once doubtful — 20%, 30% or 50% on the secured portion depending on how long it has been there, with the unsecured portion provided in full. A loss asset is provided at 100%. These are the NBFC rates and not the bank rates, which are 25%, 40% and 100% on that same secured portion. Provision held against gross NPA gives the provision coverage ratio.
Provisioning: a worked example
A book with ₹7 crore of advances and ₹8 lakh of gross NPA carrying ₹4 lakh of provision has a gross NPA ratio of 1.14% and a coverage ratio of 50%. The second number is the one a lender diligencing the book asks about, because the first says nothing about how much of it has already been absorbed.
Why does provisioning matter?
Provisioning is where asset quality reaches the accounts. A book can look stable on a classification report and be deteriorating in the provision movement, which is why the movement matters more than the balance.
What the regulations say about provisioning
Set by the RBI (Non-Banking Financial Companies — Income Recognition, Asset Classification and Provisioning) Directions, 2025, in force from 28 November 2025. The rates are not a matter of policy: a board may provide more than the Directions require and may not provide less. The standard-asset rate follows the layer, the sub-standard rate is a flat ten per cent of the outstanding, and only at the doubtful stage does the security held change the number.
What a lending system has to do about provisioning
Provision movement is a ledger of its own rather than a recomputed figure, so the change between two dates is answerable and the postings behind it can be opened.
Related terms
- NPA (non-performing asset) — An account where payment is overdue beyond the prescribed period.
- IRAC norms — Income recognition, asset classification and provisioning.
- SMA-0, SMA-1, SMA-2 — Special mention accounts — the stages before NPA.
- Interest accrual — Interest earned as time passes, whether or not it has been collected.
From the people who wrote this
Run your lending on Lenviq
The section above describes what a lending system has to do about this term. Lenviq does it — on every account, computed at day-end, with the direction it comes from recorded against it.
Lenviq is loan origination, servicing and accounting for NBFCs, built by FastLegal Technologies.