Risk Management, ALM and Prudential Norms
What the exam tests
The prudential and ALM numbers an SFB must live with: capital adequacy, asset classification and provisioning, exposure ceilings, liquidity and interest-rate risk management.
Core rules
- Capital: minimum CRAR of 15% of risk-weighted assets (against 9% for universal banks under Basel III), with Tier-I of at least 7.5%. Capital instruments must meet Basel III loss-absorption criteria.
- IRAC: an account is an NPA at 90 days overdue; earlier signals are SMA-0 (1-30 days), SMA-1 (31-60) and SMA-2 (61-90). Sub-standard, doubtful and loss assets attract prescribed provisioning.
- Exposure: single-borrower and group ceilings apply, along with limits on unsecured exposure and lending to directors' interests; concentration in a few large accounts is a supervisory concern.
- ALM: board-approved ALM policy, an Asset Liability Committee, structural liquidity statements in prescribed time buckets, interest-rate sensitivity analysis and a liquidity buffer; ICAAP and risk-based supervision cover credit, market, operational and reputational risk.
- Restructuring must not mask NPAs, and income recognition stops on non-performing loans.
Worked example
Risk-weighted assets are Rs 800 crore; Tier-I is Rs 100 crore and Tier-II Rs 30 crore. CRAR = 130/800 = 16.25% and Tier-I = 12.5%, both compliant. A new Rs 100 crore facility at 75% risk weight adds Rs 75 crore of RWA, so CRAR falls to 130/875 = 14.86%, a breach. Capital needed at 15% of Rs 875 crore is Rs 131.25 crore, so Rs 1.25 crore of fresh capital is required to support the facility.
Marks-losing traps
Applying the 9% universal-bank CRAR; using the 180-day NPA norm; ignoring off-balance-sheet and contingent exposures in RWA; treating ALM as a treasury-only exercise with no board oversight.