Allowance for Credit Losses (ACL)

The Allowance for Credit Losses (ACL) — also referred to as Loan Loss Provision or Expected Credit Loss (ECL) reserve — is a balance sheet contra-asset account maintained by banks, NBFCs, and other lending institutions that represents management's best estimate of the amount of their loan portfolio that is expected to be uncollectable. Under the Expected Credit Loss (ECL) model mandated by Ind AS 109 (equivalent of IFRS 9), institutions must recognise credit losses on a forward-looking basis — accounting for probable future losses rather than waiting for actual defaults to occur. The ACL directly reduces the gross carrying value of loans on the balance sheet, and the periodic charge to build or release the allowance flows through the income statement as 'credit costs' or 'provisions.' For investors on Ventura Securities analysing banks and financial sector stocks, the adequacy of the ACL relative to gross non-performing assets (NPA), the provision coverage ratio, and management's ECL model assumptions are among the most critical indicators of asset quality and earnings quality.