Loan loss provisions refer to the amount set aside by a bank or financial institution as a precautionary measure against potential losses due to loan defaults. This is an estimate of how much money the bank may lose if certain loans are not repaid according to their terms, and it serves as a buffer for any unexpected losses that might occur in the future.
Banks typically calculate loan loss provisions based on historical data and current economic conditions. They take into account factors such as the creditworthiness of borrowers, the type of loans being issued, and overall market trends. The amount set aside is then subtracted from the bank's earnings, which can affect its profitability in the short term but helps to ensure financial stability in the long run.
In summary, loan loss provisions are an essential part of risk management for banks, helping them to prepare for potential losses and maintain their solvency.