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 sits in the normal range of 0.5% to 0.8% for an Indian bank in an ordinary year.

The measure is what makes lending yields comparable. A lender earning 18% on unsecured personal loans with a 4% credit cost is earning a lower risk-adjusted spread than one earning 9% on secured loans with a 0.4% cost.

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

It is the number that makes lending yields comparable across very different books. A lender earning 18% on unsecured personal loans with a 4% credit cost is earning a thinner risk-adjusted spread than one earning 9% on secured loans at 0.4%, and the headline yield says the opposite. Subtract the cost before ranking anything.