Credit cost

Provisions for bad loans expressed as a percentage of the loan book. It is the price a lender pays for the risk it took.

A bank charging ₹294 crore of provisions against a ₹42,000 crore book has a credit cost of 0.7%, which is within the normal range of 0.5% to 0.8% for an Indian bank in an ordinary year.

Once funding and running costs come off too, it's the number that makes lending yields comparable across very different books. A non-bank earning 18% on unsecured personal loans, with a 4% credit cost, an 8% cost of funds and 5% of operating costs, keeps 1.0% of its book a year. A bank earning 9% on secured loans, with a 0.4% credit cost, a 6.5% cost of funds and 1% of operating costs, keeps 1.1%. Headline yield says the opposite. So the lender with twice the yield keeps less. Subtract every cost before ranking anything.

Credit cost is cyclical and averages badly. Look at it across a full cycle, including the worst year.