Accounting & Finance for Bankers
What AFM tests
Accounting & Finance for Bankers covers double-entry bookkeeping, the statutory format of a bank's final accounts, depreciation and bills of exchange, then moves to financial statement analysis, cost of capital and capital budgeting. Questions are computational rather than definitional.
Core rules
- Bank final accounts. Form A (balance sheet) and Form B (profit and loss) of the Third Schedule to the BR Act, 1949. Advances are shown net of provisions; the CRR balance and statutory reserves appear separately; bills for collection are an agency item, not an asset.
- Capital vs revenue. Spend creating a lasting benefit is capitalised; routine operating spend is charged to revenue in the year incurred.
- Depreciation. Straight-line charges an equal amount each year; written-down value charges a fixed percentage on the reducing balance, so the charge falls annually.
- Ratios. Return on assets = net profit / average total assets; GNPA ratio = gross NPAs / gross advances; NNPA ratio = net NPAs / net advances.
- Capital adequacy. CRAR = (Tier 1 + Tier 2 capital) / risk-weighted assets. India requires 9% plus a 2.5% capital conservation buffer, i.e. 11.5% in total.
Worked example
Tier 1 capital ₹900 crore, Tier 2 ₹300 crore, risk-weighted assets ₹12,000 crore. CRAR = 1,200 / 12,000 = 10.0%, below the 11.5% requirement. Capital needed = 11.5% × 12,000 = ₹1,380 crore, so the shortfall is ₹1,380 − ₹1,200 = ₹180 crore. The buffer is included inside the 11.5%, not added on top of it.
Traps
Treating revaluation reserves as Tier 1 (they are Tier 2, at a discount); presenting gross advances on the balance sheet; confusing a cash-flow statement with a fund-flow statement; and using the coupon rate as the cost of debt, ignoring the tax shield, i.e. Kd = interest × (1 − tax rate).