Provisioning coverage ratio is the percentage of bad assets/classified assets that the bank has to provide for (keep money) from their own funds –most probably from profit. The Provisioning Coverage Ratio differs with asset quality. Lower the asset quality, higher will be the provisioning coverage ratio.
If the provisioning coverage ratio is 60% for a particular category of bad loans, banks have to set aside funds equivalent to 60% those bad assets out of their profits. The assets are classified by the RBI in terms of their duration of non-repayment (NPA, doubtful asset etc.).
