What it is
When loans go bad, the bank sets aside provisions. Provision cover asks: compared with all the bad loans, how much has already been set aside?
The numerator is usually the total provision, including the 1% general provision on pass loans. That is why the ratio can exceed 100%: a bank with few NPLs but a large loan book has a big general provision relative to a small NPL figure.
High cover means future losses are already paid for. Low cover means more hits to profit are coming if the loans do not recover.
How it is calculated
Provision cover (%) = Total loan loss provision ÷ Total non-performing loans × 100.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's loan loss provision to NPL was 119.73% at the end of FY 2082/83 Q4, with a gross NPL of 4.20%.
What good looks like
Higher is better. Cover above 100% is common for banks with low NPL. Falling cover alongside rising NPL is the warning sign: bad loans are growing faster than the money set aside for them.
Watch out
- A very high ratio can simply mean NPLs are tiny, not that the bank is unusually prudent.
- Rising NPL mechanically lowers cover even if provisions rise.
- Some analysts use only specific provisions on NPL in the numerator; the filing's number uses the total.
In Nepal
NRB minimum provisions by class (pass 1%, watch list 5%, substandard 25%, doubtful 50%, loss 100%) set the floor for the numerator; banks may provision more under NFRS 9 expected credit loss, effective FY 2081/82.
Sources
- Banks to provide only 1 percent loss on good loans (Falgun 13, 2081), Kantipur
- NRB reduces provisioning on good loans to 1 percent from 1.10 percent (Feb 2025), Republica
- NRB loan classes and provision rates, Sharesansar
- Pass loan provision 1.1% from FY 2081/82 (superseded by 1% in Feb 2025), Sharesansar
- NRB ECL Guidelines (NFRS 9 fully effective FY 2081/82)
Questions
The numerator includes the general provision on all good loans. With few bad loans, that general pool alone can exceed total NPL.
It means 40% of bad loans are not yet provided for. Whether that is a problem depends on collateral and recovery prospects, but it signals future charges may come.