What is Credit Cost? Measuring Loan Loss Write-Offs
The Answer
Credit Cost is the percentage of a lender's total loan book that is written off or set aside as provisions for defaults during a financial period. It represents the direct impact of loan losses on the income statement.
Why it Matters
Lenders with high yields often hide high credit cost. A credit cost exceeding 2.0% for retail NBFCs eats up interest margins and signals underwriting failures.
Sentinel Insight
βEvaluate blended yields against Credit Cost. A lender reporting 22% yields but 5% credit cost is less resilient than one with 14% yields and 0.5% credit cost.β
π How to Interpret
In Risk Context
Flagium monitors Credit Cost. If credit cost rises sequentially or outpaces asset growth, it triggers an earnings quality alert.
Deep Dive
Credit Cost: The Price of Growth
Credit Cost represents the true operating cost of a lender's risk underwriting. While interest income represents revenue, credit cost functions as raw material cost representing default write-offs.
The Credit Cost Formula
Credit Cost is annualized and calculated as:
\text{Credit Cost (\%)} = \frac{\text{Provisions & Bad Debts Written Off}}{\text{Average Total Loan Assets}} \times 100
A spike in credit cost signals that the bank's underwriting standards have deteriorated in pursuit of aggressive loan growth.
Detect risk early
Flagium tracks these signals across multiple quarters to help you avoid structurally weak companies before it reflects in price.
Compare Credit Costs across NBFCs βππ Related Topics
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