Provisioning coverage ratio refers to the ratio of outstanding provision to gross NPAs (non-performing assets).
So, Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross non-performing assets and indicates the extent of funds a bank has kept aside to cover loan losses.
It works as a macro-prudential measure, with a view to augmenting provisioning buffer in a counter-cyclical manner when the banks were making good profits.
Some bits you must know:-
(a) Provisioning Coverage Ratio (PCR) was introduced during Oct, 2009. It was decided by RBI that banks should augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent.
(b) The motive of RBI was to create provisioning and capital buffers in good times i.e. when the profits are good, which can be used for absorbing losses in a downturn.
(c) This was decided to enhance the soundness of individual banks, as also the stability of the financial sector.
(d) PCR conformed the more comprehensive methodology of countercyclical provisioning taking into account the international standards as are being currently developed by Basel Committee on Banking Supervision (BCBS).
(e) It has been withdrawn with effect from sep 2011 due to rising credit crunch among public sector banks.