Loan loss provision

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

A provision is the amount a bank sets aside in its accounts against loans it does not expect to recover in full. Under current accounting standards it is forward-looking: an allowance on performing loans drawn from expected loss, and a larger one once a loan's credit risk has increased significantly or it is impaired. A provision recognises a loss in the accounts; it is not a write-off, and the debt is still owed and still being collected.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.