1. What is NBFC Credit Cost Ratio?

The Credit Cost Ratio for NBFCs (Non-Banking Financial Companies) measures the proportion of provisions made against the average advances portfolio. It indicates the cost of credit risk and asset quality of the lending institution.

2. How Does the Calculator Work?

The calculator uses the Credit Cost formula:

Where:

• \( \text{Provisions} \) — Total provisions made for bad debts and NPAs (INR)
• \( \text{Average Advances} \) — Average loan portfolio during the period (INR)

Explanation: This ratio helps assess the credit risk management efficiency and provisioning adequacy of NBFCs.

3. Importance of Credit Cost Calculation

Details: Monitoring credit cost is crucial for NBFCs to evaluate portfolio quality, set appropriate provisioning policies, and maintain regulatory compliance. Lower ratios indicate better asset quality.

4. Using the Calculator

Tips: Enter provisions and average advances in INR. Both values must be positive, with average advances greater than zero for valid calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good credit cost ratio for NBFCs?
A: Generally, lower ratios are better. Ratios below 1-2% are considered good, but this varies by lending segment and economic conditions.

Q2: How does credit cost differ from NPA ratio?
A: Credit cost measures actual provisions made, while NPA ratio measures non-performing assets. Credit cost reflects the financial impact of credit risk.

Q3: What factors affect credit cost?
A: Economic cycles, portfolio quality, recovery efficiency, regulatory requirements, and provisioning policies significantly impact credit cost.

Q4: How often should credit cost be calculated?
A: Typically calculated quarterly and annually as part of financial reporting and risk management processes.

Q5: Can credit cost be negative?
A: No, credit cost cannot be negative as provisions are always positive expenses. However, write-backs can reduce provisions in some cases.