Professional Knowledge: Capital Adequacy, Asset Quality and Recovery
Professional Knowledge covers credit appraisal, capital adequacy, asset classification, priority sector norms, recovery law and trade finance. Questions are numerical or definitional, so exact thresholds matter.
Capital adequacy
Capital to risk-weighted assets ratio equals Tier 1 plus Tier 2 capital divided by risk-weighted assets. The RBI requires 11.5%, being 9% minimum plus a 2.5% capital conservation buffer; within Tier 1, common equity Tier 1 must be at least 5.5% plus the buffer. Basel III rests on three pillars: minimum capital, supervisory review, and market discipline.
Asset classification
A loan becomes a non-performing asset when interest or principal is overdue beyond 90 days. Special mention accounts run SMA-0 to 30 days, SMA-1 from 31 to 60 days, and SMA-2 from 61 to 90 days. An NPA stays substandard for up to 12 months, then doubtful, and becomes a loss asset when identified as uncollectible.
Priority sector and recovery
Priority sector lending is 40% of adjusted net bank credit, with agriculture at 18%, weaker sections at 12%, and micro enterprises at 7.5%. The SARFAESI Act, 2002 allows secured creditors to enforce security without court intervention; the Insolvency and Bankruptcy Code, 2016 provides a corporate insolvency resolution process of 180 days, extendable by 90.
Worked example
Risk-weighted assets are 8,000 crore rupees, Tier 1 capital 600 crore and Tier 2 capital 320 crore. Total capital is 920 crore, so the ratio is 11.5%, exactly meeting the requirement including the buffer. If Tier 2 were only 200 crore, the ratio would fall to 10%, needing 120 crore of extra capital.
Traps that cost marks
The NPA clock starts from the overdue date, not the sanction date. The priority sector denominator is adjusted net bank credit, not total assets.