Loan Loss Provision

Loan loss provision refers to the provision created for possible default on loans given out by the bank or financial institution.

Banks and financial institutions lend to a wide range of customers like individuals, medium & small enterprises (MSME) and giant corporations. Due to a range of reasons, some of these loans might not be returned, i.e they might turn bad and in other cases, loans might not be returned on time. Hence, in order to cover these possible losses, the bank sets aside a portion of the repaid loan amount. The loan loss provision acts as an internal insurance fund.