Reading a Three-Branch Performance Sheet Before the Credit Policy Review
A regional office is reviewing three branches ahead of the annual credit policy meeting. All figures are in Rs crore.
| Branch | Deposits FY24 | Deposits FY25 | Advances FY24 | Advances FY25 | Gross NPA FY24 | Gross NPA FY25 |
|---|---|---|---|---|---|---|
| A | 1,000 | 1,200 | 800 | 900 | 32 | 45 |
| B | 750 | 800 | 700 | 760 | 49 | 68 |
| C | 1,300 | 1,500 | 950 | 1,050 | 38 | 63 |
The regional head says Branch B has "the worst asset quality in the region" and Branch C's manager says his branch "has the best record because NPAs are still the lowest in absolute terms". The board has also set an internal credit-deposit (CD) ceiling of 78% for every branch. The review must decide which branch is the real problem, whether Branch B can absorb fresh advances if Rs 200 crore of new deposits are mobilised, and whether the explanation offered by Branch B's manager - that its NPA ratio rose only because advances grew slowly - is tenable.
1. Compute the gross NPA ratio for each branch in both years and decide which branch deteriorated most. Comment on the two competing claims.
Read the worked answer
Gross NPA ratio = Gross NPA / Gross Advances.
| Branch | FY24 | FY25 | Change |
|---|---|---|---|
| A | 32/800 = 4.00% | 45/900 = 5.00% | +1.00 pp |
| B | 49/700 = 7.00% | 68/760 = 8.95% | +1.95 pp |
| C | 38/950 = 4.00% | 63/1,050 = 6.00% | +2.00 pp |
Finding: Branch C shows the sharpest deterioration (+2.00 percentage points), Branch B the highest absolute level (8.95%).
On the two claims: the regional head is right that B has the worst stock of bad loans, but wrong to close the discussion there - a branch at 7% that slips to 8.95% is less alarming than one that doubles its slippage from 4% to 6%. C's manager is wrong: 63 crore is the largest NPA book in the region, not the smallest, and absolute NPA without a denominator says nothing about quality. The correct reading is that B is the chronic problem and C the emerging one, which calls for different remedies - recovery drive for B, slippage control and underwriting review for C.
2. Branch B mobilises Rs 200 crore of fresh deposits. At the 78% CD ceiling, how much room does it have to grow advances? Show the arithmetic.
Read the worked answer
Current CD ratio (FY25): 760/800 = 95.0%. Branch B is already 17 percentage points above the 78% ceiling, so it has no headroom at all today.
After Rs 200 crore of new deposits: deposits = 800 + 200 = Rs 1,000 crore.
Maximum advances permitted at 78%: 0.78 × 1,000 = Rs 780 crore.
Compare with existing advances: Rs 760 crore < Rs 780 crore, so headroom = 780 − 760 = Rs 20 crore.
Conclusion: the deposit inflow does not permit a lending push; it merely repairs the breach enough to allow Rs 20 crore of incremental advances while staying inside the ceiling. Without the new deposits, the branch would have had to reduce advances to 0.78 × 800 = Rs 624 crore, i.e. by Rs 136 crore. The useful message for the review is that B's problem is a funding gap, not an appetite gap: growth in advances has outrun deposit mobilisation, and any fresh sanctions must be tied to verified deposit accretion.
3. Branch B's manager argues that his NPA ratio rose only because advances grew slowly. Test this claim numerically.
Read the worked answer
Isolate the denominator effect. If no new slippage had occurred, FY25 gross NPA would have stayed at Rs 49 crore. On advances of Rs 760 crore that gives 49/760 = 6.45% - lower than the 7.00% of FY24, because the denominator grew 8.6%.
Compare with the actual outcome: 8.95% on Rs 760 crore = Rs 68 crore of gross NPA. So fresh slippage = 68 − 49 = Rs 19 crore.
Alternative check - constant-ratio test: at the FY24 ratio of 7.00%, advances of Rs 760 crore would carry Rs 53.2 crore of NPA. Actual NPA is Rs 68 crore, i.e. Rs 14.8 crore above what the old ratio would have produced.
Verdict: the claim is not tenable. Slow advances growth, if anything, helped the ratio; the entire deterioration, and more, came from fresh slippage and possibly weak recovery. The review should reject the explanation and ask for a segment-wise slippage analysis (retail vs MSME vs agriculture) before accepting any branch projection for FY26.