Loan-loss provisions and credit cost: reading a lender's results

A provision is a cost that a lender records now for losses it expects later. When a lender makes a loan, it knows that some borrowers will not pay back. Instead of waiting for the default, it sets aside money in advance, and the amount appears in its profit and loss account as an expense.

Provisions lower profit but do not move cash out of the lender on that day. They are an accounting estimate. If the borrowers pay back more than expected, the extra can be released later and add to profit. If fewer pay, the lender has to provide more. As a live case, StopDown covered NeoGrowth's FY26 results, where loan-loss provisions stayed high while revenue fell.

Credit cost is the amount a lender charges for bad loans in a period, divided by its average loan book, shown as a percentage. It usually combines the provisions made and the loans written off. A lender with a ₹1,000 crore book and ₹50 crore of such charges in a year has a credit cost of 5%.

Credit cost is the number lenders and analysts compare, since it shows how much of each rupee lent is lost. A lender of small unsecured loans may have a credit cost of several percent, and a lender against property a much lower one. Its level tells you about the risk the lender takes, and its change over time tells you whether that risk is rising or falling.

A loan becomes a non-performing asset (NPA) when the borrower has not paid interest or principal for 90 days or more. This 90-day test is the Reserve Bank of India (RBI) norm for banks and, under its scale-based regulation for non-bank finance companies (NBFCs) from 2021, for NBFCs as well, with a phase-in for some of them. Check the latest RBI directions for the exact timing, as of November 2026.

Once a loan is an NPA, the lender stops counting the unpaid interest as income and moves the loan through categories as time passes. The older the default, and the less security backs the loan, the larger the share of the loan that must be provided for.

• Standard: payments are up to date or less than 90 days late.
• Sub-standard: a non-performing loan in its early stage.
• Doubtful: a non-performing loan that has stayed bad for longer.
• Loss: the lender expects no recovery.

Gross NPA is the total value of bad loans, shown as a share of all loans. Net NPA is gross NPA minus the provisions already made against those loans. Net NPA therefore shows the part of bad loans that is not yet covered.

A third figure is the provision coverage ratio, which is provisions divided by gross NPA. A high ratio means the lender has already set aside most of its expected loss. Looking at gross NPA alone can mislead, because a lender with high gross NPA and high coverage may be safer than one with low gross NPA and almost no cover.

There are two approaches. Under the RBI's prudential norms, the rules set percentages by asset class. A small percentage applies to standard loans, a bigger one to sub-standard ones, and up to the full amount for loss assets. Companies that report under Ind AS follow Ind AS 109, which asks for expected credit losses.

Ind AS 109 sorts loans into stages. Stage 1 loans are performing, and the lender provides for losses expected over a short period. Stage 2 loans have a significant rise in risk, and provisions cover the whole life of the loan. Stage 3 loans are credit-impaired, and a loan more than 90 days overdue is presumed to be in this stage. Regulated NBFCs also compare the result with the RBI norms, so readers should check the latest directions for how the two are combined.

For a lender, provisions can be one of the largest costs after the interest it pays on its own borrowing. When economic conditions worsen, more borrowers fall behind, and the lender has to raise provisions quickly. A profitable year can become a loss when this one line grows faster than income.

Provisions can also help profit. When recoveries improve or the lender writes back earlier provisions, the cost falls and profit rises, even if the lending business did not change. This is why analysts look at profit before provisions and at provisions separately.

When a lender's results show a loss or a profit swing, read the provisions line first. Compare it with revenue, with the loan book and with the previous year. A loss that comes with falling revenue and steady provisions has a different cause from a loss caused by a sudden jump in provisions.

In NeoGrowth's case, the story reports a loss, lower revenue and provisions that stayed near the same level. Reading a headline like that well means asking whether the cause is weaker income, a heavier credit cost or both. Useful questions are listed below.

• How large are provisions compared with revenue?
• Is gross NPA rising or falling?
• How much of the bad book is covered by provisions?
• Were loans written off, and how many?
• Did the lender change how it estimates losses?

A provision is an estimate set aside before a loan is lost. A write-off happens when the lender decides it will not recover the loan and removes it from its books, usually using the provision it has already made. The lender may still try to collect after a write-off, and later recoveries are counted as income.

Some lenders write off loans quickly and show a lower gross NPA, while others keep bad loans on the books for longer. This is why analysts look at gross NPA, write-offs and provisions together. A falling gross NPA is a good sign only if it comes from recoveries and not only from write-offs.

Lenders manage credit cost through careful borrower selection, smaller loan sizes and security. Some share risk with partners. In co-lending, a bank funds part of the loan. Some fintech lenders also offer a first-loss default guarantee to a partner, which means they absorb a set share of early losses. These choices change who bears the provisions, and they are worth checking in a lender's filings. This is general information and not advice, so check with a professional before relying on it.