Loan Loss Provision

A loan loss provision is an amount of money set aside by a lender to cover potential losses on loans that may not be repaid. The provision is based on an estimate of the lender's historical loss experience and current economic conditions.

Loan loss provisions are an important part of a lender's financial statements. They help to ensure that the lender has sufficient funds to cover losses on loans that go bad. Loan loss provisions can also help to protect a lender's earnings and capital.

There are two main types of loan loss provisions: general and specific. A general loan loss provision is an estimate of the lender's potential losses on all of its loans. A specific loan loss provision is an estimate of the lender's potential losses on a specific loan or group of loans.

General loan loss provisions are typically based on the lender's historical loss experience. The lender will review its historical data to determine the average amount of money it has lost on loans each year. The lender will then multiply this amount by a factor to account for changes in economic conditions.

Specific loan loss provisions are typically based on the lender's current assessment of the risk of a particular loan or group of loans. The lender will review the loan or loans to determine the likelihood that they will not be repaid. The lender will then estimate the amount of money it could lose if the loan or loans are not repaid.

Loan loss provisions are an important part of a lender's financial statements. They help to ensure that the lender has sufficient funds to cover losses on loans that go bad. Loan loss provisions can also help to protect a lender's earnings and capital.