Loan Loss Provisions

Loan loss provisions are financial reserves that banks set aside to cover potential losses from borrowers who might default on their loans. This practice helps ensure that the bank maintains stability and can absorb financial shocks. By estimating how much money might not be repaid, banks can better manage their overall risk. When a loan is expected to go bad, the provision is used to offset the loss, reflecting a more accurate picture of the bank's financial health. Essentially, it’s a safety net that helps protect banks from unexpected losses in their lending activities.