What is the meaning of provisions in banking terminology?

Provisions are nothing but the liabilities for which the company has to earmark some funds which will be used for payment towards them. These may be some known as well as anticipated expenditures expected in future. these are invariably shown in the balance sheet of the company so that the people can know about those provisions just by a glance on the balance sheet.
Some examples are tax liabilities in coming quarters of the year, some anticipated expenditures on sending people for some conference which is likely to be after 6 months, a part of the loan which bank or company feels that it will not be received back (known as loan loss provision) etc. Provisions are also made for those situations which are not there but which may arise in future. Keeping all the anticipated expenditures and funds requirements under the liabilities is a healthy practice and most of the companies follow it meticulously. Provisions are also mentioned under the liability head because company will have to spend that amount if that situation arises.

The general meaning for the term provision (in accounting particularly) is 'to provide for some expenses which has not arisen now, but may anise in future. It is a cushion and a prudent way of managing the working funds and safeguarding from value erosion or sudden loss.

But when the term is used in relation to banks' annual results and balance sheet reckoning, it has some more specific meaning. It is a fund provision- based on certain statutory and prudent accounting norms – to earmark a certain percentage of the assets (Loans and credits and advances given by banks) and keep apart for any loss or value erosion of assets that may happen in future.

In Banks, there is a risk of borrowers defaulting the loans availed by them. Norms are stipulated to categorize the loans and advances by banks into different categories as per health of the loan( which is based on regularity or irregularity of interest service, repayment, collateral value, utilization etc.) The loans showing unhealthy signals are classified as sub-standard debts of different stage. The healthy loans, where the interest service, repayment, utilisation ,turnover etc. are regular as per norms, are called Standard loans. Even Standard loans also have to be provided for with a minimum percentage provision. The provision increases as per the worsening standard categorisation. Where there is almost no chance of recovery the provision is one hundred percent of the outstanding amount of loan.

As the provision is earmarked from the current year profit, any future recovery on these sub standard assets is directly added to the profit as and when recovered. This helps banks from any sudden shocks of loss and also helps in funds by subsequent recovery. This also helps in 'cleaning; the balance sheet and giving a true picture of the bank's business in relation to capital stability or adequacy.

Provisions are the essential component of a balanced sheet presented by the company and maintaining such a fund will take care of emergency needs in case of heavy debt incurred by the company or keeping in view of such situations when the company might fail to procure loan as anticipated from the banks for their future expansion of business. It is a kind of liability and this must reflect in the balance - sheet of the company so that the share holders or promoters could know such funds parked aside as provisions.
While talking about the nature of provisions, it can be enlarged even for the purposes of meeting tax liabilities, pending wage revision settlements of the existing employees or sending some of employees abroad for the specialised training in abroad.
Apart from the reasons indicated above, sometimes financial needs for the future cannot be ascertained immediately to the authorities of the company but they park some funds against the liability head in the balance sheet to make their shareholders and promoters regarding the quantum of funds kept reserved for the unforeseen circumstances.

Provision is to provide for a loss in advance that has not arisen yet. Generally, there are three terms, provisions, liabilities, and reserves. Liability is when the amount due as well as the person toward which it exists both are certain however in provision amount of loss is not certain and hence a certain percentage of the total amount is set aside in advance. The purpose of this is to provide a cushion, in simpler terms if the loss amount is huge it would not affect the profits of a particular year and hence trend remains unaffected.
In banks requirements of provisions are determined by RBI and their regulations are strict because the chances of loss in the banking business are quite high. Banks classify their loans and advances as performing and nonperforming assets. Nonperforming are further classified as substandard, doubtful, and loss assets. Further
assets are classified on the basis of security i.e. secured and unsecured. Under each category rate for creating provisions is different. For example rate for provision for loss assets are 100%.