Provisioning is the practice of setting aside funds by a company or bank to cover expected future losses, expenses, or liabilities.
Provisioning is an important concept in accounting and banking where entities recognize potential losses in advance. This ensures that financial statements present a realistic view of financial health.
In the banking sector, provisioning is commonly used for bad loans (NPAs). Banks are required to set aside a portion of funds as provisions as per guidelines of the Reserve Bank of India.
"A bank expects that ₹1 lakh of its loans may become bad, so it sets aside this amount as a provision."