Advanced Bank Management (ABM): Capital, Asset Quality and Credit Ratios
ABM tests whether you can apply prudential norms, credit appraisal and balance-sheet logic to bank numbers. Expect calculation-led questions where the rule, the denominator and the threshold all matter.
Capital adequacy
Under Basel III as applied by RBI, minimum CET1 is 5.5% of RWA, Tier 1 is 7% and total CRAR is 9%. Add the 2.5% Capital Conservation Buffer, which must be met with CET1, and the effective minima are CET1 8%, Tier 1 9.5% and total 11.5%. The countercyclical buffer is up to 2.5% when activated. Leverage ratio is 3.5% (4% for D-SIBs); LCR and NSFR must each be at least 100%. RWA includes credit, market and operational risk-weighted assets, not merely loans.
Asset quality
An NPA is an exposure overdue for more than 90 days. SMA buckets are SMA-0 (1–30 days), SMA-1 (31–60) and SMA-2 (61–90); these are not NPAs. A substandard asset has remained NPA for up to 12 months; doubtful assets are D1 (up to 1 year as doubtful), D2 (1–3 years) and D3 (over 3 years); loss assets are identified as largely unrecoverable. Provisioning rises with ageing: 15% on the secured portion of substandard advances, 25%/40%/100% for doubtful D1/D2/D3 secured exposures, and 100% for loss assets.
Credit ratios
DSCR = EBITDA ÷ (interest + principal repayment); above 1.5 is comfortable. TOL/TNW should normally be within 3:1, and current ratio at least 1.33.
Worked example
CET1 is 70, AT1 is 20, Tier 2 is 30 and RWA is 1,000. CET1 ratio = 70/1,000 = 7%; Tier 1 = 90/1,000 = 9%; total CRAR = 120/1,000 = 12%. The bank meets the 11.5% total requirement but fails the 8% CET1 requirement including CCB by 1%, a 10 crore CET1 shortfall. AT1 or Tier 2 cannot cure a CET1/CCB shortfall.
Traps
Do not divide capital by total assets instead of RWA; do not treat SMA-2 as NPA; do not use EBITDA/interest alone for DSCR; and remember that a negative cumulative ALM gap in near buckets signals liquidity pressure.