Provision For Credit Losses - PCL

AAA

DEFINITION of 'Provision For Credit Losses - PCL'

In accounting, an estimation of potential losses that a company might experience due to credit risk. Provision for credit losses is an estimated amount to be lost and is treated as an expense on the company's financial statements. Companies that engage in lending activities determine the provision for credit losses based on statistics that define the likelihood that debt will be recovered.

INVESTOPEDIA EXPLAINS 'Provision For Credit Losses - PCL'

The provision for credit losses is a means for financial institutions to account for expected losses from delinquent and bad debt. Based on historical statistics, a financial institution can make estimates regarding the amount of loans or other credit that is likely to become default and unsatisfied (default probability). If, for example, the company calculates that accounts over 90 days past due have a recovery rate of 40%, they can make a provision for credit losses based on 40% of the balance of these accounts.

RELATED TERMS
  1. Problem Loan Ratio

    A ratio in the banking industry that denotes the percentage of ...
  2. Bad Debt

    A debt that is not collectible and therefore worthless to the ...
  3. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
  4. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
  5. Bad Debt Reserve

    An account set aside by a company to account for and offset losses ...
  6. 60-Plus Delinquencies

    Home loans that are more than 60 days past due on their monthly ...
Related Articles
  1. Credit Default Swaps: What Happens In ...
    Insurance

    Credit Default Swaps: What Happens In ...

  2. Credit Default Swaps: An Introduction
    Bonds & Fixed Income

    Credit Default Swaps: An Introduction

  3. The Debt Ratings Debate
    Personal Finance

    The Debt Ratings Debate

  4. Why Hedge Funds Love Distressed Debt
    Mutual Funds & ETFs

    Why Hedge Funds Love Distressed Debt

Hot Definitions
  1. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  2. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  3. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  4. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  5. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
  6. Macroeconomics

    The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena ...
Trading Center