What is a non-performing loan?

A loan the bank no longer expects to be paid as agreed. The common definition counts a loan as non-performing once a payment is ninety days past due, or earlier if the bank judges the borrower unlikely to pay in full without the security being sold; regimes differ in the detail, and a bank's own policy may be stricter. A loan can be non-performing with no payment yet missed, which is why the classification is a judgement as much as a count of days.

What is a good provision coverage ratio?

There is no figure to aim at, because the uncovered share rests on what the bank holds. A bank whose problem loans are secured on property it can sell needs less coverage than one whose book is unsecured, and a bank that writes loans off quickly shows lower non-performing loans and higher coverage than one that keeps them on the book while it works them out. Coverage is read against the security and the write-off policy, and against the same bank a year earlier — not against a league table.

Can provision coverage be over 100%?

Yes, and it is common under expected credit loss accounting, because provisions are held against performing loans as well — twelve months of expected loss on every loan from the day it is written, and lifetime expected loss on loans whose risk has risen but which are not yet non-performing. Total provisions can therefore exceed the non-performing loans they are compared with. A coverage ratio well over 100% says the bank is providing for loans that have not yet gone wrong, not that it is over-providing for those that have.

What is the difference between a provision and a write-off?

A provision is a charge the bank takes against profit for a loss it expects; the loan stays on the balance sheet, with the provision netted against it. A write-off removes the loan, or the unrecoverable part of it, from the balance sheet altogether once the bank has decided it will not be collected, and uses up the provision held against it. Provisions move the profit; write-offs move the non-performing ratio and the coverage ratio, which is why both must be read together.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Provision Coverage Ratio: a Worked Example

Provisions over non-performing loans — and the two ratios it is confused with.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-10-11

// THE SHORT ANSWER

Provision coverage is the share of a bank's non-performing loans that its provisions already cover: provisions held divided by non-performing loans. A bank with US$10bn of loans, US$300m non-performing and US$180m of provisions has coverage of 60%, a non-performing loan ratio of 3% and a provisions-to-loans ratio of 1.8% — three different ratios that are read together. The 40% uncovered is what collateral and recoveries must bring in, which is why coverage is read against the security behind the book, not against a league table.

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.

// MAKE THE CALL

Issue 09 — The Tuesday List. Eight dashboards. Two intensive-care slots. Portfolio triage, Tuesday 8:30am. Your call first, then the senior banker's.

Read the file →

// 01 — THREE RATIOS, ONE LOAN BOOK

A bank's annual report gives three figures for its loan book, and three ratios are built from them. They are read together, and confused with one another more than any other numbers in bank analysis:

Non-performing loan ratio = non-performing loans ÷ gross loans how much of the book has gone bad

Provisions to loans = provisions ÷ gross loans how much of the whole book is provided for

Provision coverage = provisions ÷ non-performing loans how much of the bad part is already paid for

The first is about the past year's lending; the second about the bank's caution across the whole book; the third about how much of a loss already recognised is still to come through the profit. The glossary entry defines the provision; this page works the ratio.

// 02 — THE EXAMPLE

A bank — constructed for this page — reports gross loans of US$10bn, non-performing loans of US$300m and provisions of US$180m.

Non-performing ratio = 300 ÷ 10,000 = 3.0%

Provisions to loans = 180 ÷ 10,000 = 1.8%

Provision coverage = 180 ÷ 300 = 60%

Sixty per cent of the loans that have gone bad are already paid for through the profit of earlier years. The other 40% — US$120m — is what the bank expects to get back from selling the security and chasing recoveries, or will have to take through profit later if it does not. A reader who quotes 1.8% as the coverage has measured the whole book's caution, not the bad loans' cover; one who quotes 3% has measured the size of the problem, not how much of it is paid for.

// 03 — WHAT MOVES EACH NUMBER

Three things move these ratios, and only one of them is a loan going bad. A loan newly classed as non-performing raises the first ratio and, until the provision catches up, lowers coverage. A provision raised against it lowers that year's profit and restores coverage. A write-off removes the loan and its provision together: the non-performing ratio falls and coverage can rise, with the bank no better off. Two banks with the same losses can therefore show a 3% ratio with 60% coverage, or a 1.5% ratio with 90% coverage, depending only on how quickly they write off.

Under expected credit loss accounting the provision moves before the loan does. A loan whose risk has risen significantly carries a lifetime provision while it is still performing, which is the jump a reader sees in the file before any payment is missed, and the reason coverage can exceed 100% at a bank that provides early.

WORK IT · THE NUMBER → · STAGING, THE FIRST QUESTION → · FORBEARANCE, SIGNAL OR NOISE →

// 04 — WHERE IT DECIDES A FILE

Inside a bank, the ratio is the sum of every file on the watch list, which is where Issue 09 sits: eight names on a Tuesday morning, two slots in intensive care, and the question of which files the bank can still change the ending of before they become part of the 3%. The credit risk page is the machinery around it, and workout is where the uncovered 40% is recovered or lost.

ISSUE 09 · THE TUESDAY LIST → · EXPECTED LOSS → · RISK-WEIGHTED ASSETS →

// STANDARDS THIS SITS BESIDE

The recognised ground this page sits beside. Each was opened and checked when cited; none is a source for the framework itself.

Basel Committee on Banking Supervision, Prudential treatment of problem assets — definitions of non-performing exposures and forbearance (April 2017) — Harmonises the definition of a non-performing exposure around delinquency of more than 90 days or the unlikeliness of repayment — the non-performing loans in section 01.
IFRS Foundation, IFRS 9 Financial Instruments — overview of the standard — IFRS 9's impairment requirements account for an entity's expected credit losses on its financial assets and commitments to extend credit — the provisions in section 01.
Australian Prudential Regulation Authority, Prudential Standard APS 220 Credit Risk Management (in force 1 January 2023) — paragraph 84 — A bank must regularly review its exposures to keep their classification, provisioning levels and write-offs right — the three movements in section 03.

// QUESTIONS PEOPLE ASK

What is a non-performing loan?: A loan the bank no longer expects to be paid as agreed. The common definition counts a loan as non-performing once a payment is ninety days past due, or earlier if the bank judges the borrower unlikely to pay in full without the security being sold; regimes differ in the detail, and a bank's own policy may be stricter. A loan can be non-performing with no payment yet missed, which is why the classification is a judgement as much as a count of days.
What is a good provision coverage ratio?: There is no figure to aim at, because the uncovered share rests on what the bank holds. A bank whose problem loans are secured on property it can sell needs less coverage than one whose book is unsecured, and a bank that writes loans off quickly shows lower non-performing loans and higher coverage than one that keeps them on the book while it works them out. Coverage is read against the security and the write-off policy, and against the same bank a year earlier — not against a league table.
Can provision coverage be over 100%?: Yes, and it is common under expected credit loss accounting, because provisions are held against performing loans as well — twelve months of expected loss on every loan from the day it is written, and lifetime expected loss on loans whose risk has risen but which are not yet non-performing. Total provisions can therefore exceed the non-performing loans they are compared with. A coverage ratio well over 100% says the bank is providing for loans that have not yet gone wrong, not that it is over-providing for those that have.
What is the difference between a provision and a write-off?: A provision is a charge the bank takes against profit for a loss it expects; the loan stays on the balance sheet, with the provision netted against it. A write-off removes the loan, or the unrecoverable part of it, from the balance sheet altogether once the bank has decided it will not be collected, and uses up the provision held against it. Provisions move the profit; write-offs move the non-performing ratio and the coverage ratio, which is why both must be read together.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE NUMBER · THE BANK · ASSET QUALITY

A bank's annual report gives three figures for its loan book.

Gross loans: US$10bn
Non-performing loans: US$300m
Provisions held: US$180m

What is its provision coverage of non-performing loans?

5 MORE ON THE BANK · ASSET QUALITY →WHERE DO YOU READ FROM? THE PLACEMENT →