Q. Consider the following statements:
1.A loan loss provision is a cash reserve that banks set aside to cover losses incurred from defaulted loans.
2.Under Expected Credit Loss (ECL)-based loan loss provisioning framework, banks are mandated to forecast anticipated credit losses through forward-looking estimations, rather than waiting for credit losses to materialize before making corresponding provisions for those losses.
3.Excessive loan loss provision will significantly increase net interest income and increase overall operating profit.
Which of the statements given above are correct?
Answer: A
Notes:
Explanation –
Statement 1 and 2 are correct. A loan loss provision is a cash reserve that banks set aside to cover losses incurred from defaulted loans. Under Expected Credit Loss (ECL)-based loan loss provisioning framework, banks are mandated to forecast anticipated credit losses through forward-looking estimations, rather than waiting for credit losses to materialize before making corresponding provisions for those losses.
Statement 3 is incorrect. Excessive loan loss provision will significantly reduce net interest income and reduce overall operating profit.
Source: ForumIAS
