Provisioning Coverage Ratio
The Provisioning Coverage Ratio (PCR) measures the proportion of a bank's non-performing assets that is covered by accumulated provisions, indicating how well-protected the bank's balance sheet is against potential loan losses.
When a loan turns non-performing, Indian banks are required by the RBI to set aside provisions—a charge against profits—to absorb the anticipated loss. The Provisioning Coverage Ratio compares the total cumulative provisions held against NPAs with the gross NPA stock, expressed as a percentage. A PCR of 70% means the bank has already set aside ₹70 for every ₹100 of bad loans on its books.
The RBI introduced a minimum PCR requirement of 70% in 2009 as a counter-cyclical buffer during the global financial crisis, asking banks to build provisioning buffers ahead of expected losses. Many well-capitalised Indian banks—State Bank of India, HDFC Bank, Kotak Mahindra Bank—maintained PCRs well above 70%, sometimes reaching 85% or higher during periods of aggressive NPA clean-up.
PCR is calculated in two ways. The first excludes technical write-offs from both the numerator and denominator (narrower definition). The second includes written-off accounts in the calculation, giving a broader sense of how well the bank has addressed its historical NPA stock. Analysts typically prefer the narrower definition for balance-sheet assessment.
A rising PCR is generally viewed positively—it means the bank is recognising and absorbing credit losses proactively, reducing the risk of large future write-offs. A bank with a low PCR but deteriorating asset quality is sitting on a ticking time bomb: future provisions will eat into profitability sharply. This was precisely the situation with several public sector banks between 2015 and 2018, when the RBI's Asset Quality Review (AQR) forced banks to reclassify and provision for loans that had been evergreened.
For investors reading quarterly results, PCR is often disclosed in bank investor presentations. Comparing a bank's PCR with its peer group, tracking whether it is stable or declining, and cross-referencing it with the bank's NPA trends offers a layered picture of credit quality. High PCR combined with declining fresh slippages is typically the most constructive signal for asset quality improvement.