Question

What is the provision for loan loss and what affects it?

Answer 1

Provision for loan loss is a proactive provision which is made by the bank when it anticipates that the loan which has been granted by the banks to the borrower is going to be defaulted by the borrower and he is not able to pay the loan so the bank will be determining those defaults in advance and they will be trying to make a provision for these losses so that all the prospective shareholders are aware of these positions of the bank and the bank will be having various rules and regulations in order to record these provisions for bad loans.

provision for bad loans is affected by the ability of the borrower to repay the loan has gone down because of various financial and economic situations and the banks will be trying to recognise it in advance or the bank will have to provide the borrower with the haircut so the bank will be trying to estimate those losses in advance and make a provision.