Branch Retail Portfolio and NPA Target Review
A branch of a scheduled commercial bank in Hubballi is reviewing its retail portfolio. In 2023-24, home loans outstanding were ₹48 crore, vehicle loans ₹32 crore and personal loans ₹20 crore; total deposits were ₹160 crore. In 2024-25, home loans grew by 25%, vehicle loans by 10% and personal loans fell by 15%; deposits grew by 12.5%. The branch's gross NPA at the end of 2024-25 was ₹9.6 crore, and it made a provision of ₹3.2 crore against these NPAs. Interest income from advances is estimated at 9% of closing advances, while interest paid on deposits is 4.5% of closing deposits. The branch's annual target is a credit-deposit (CD) ratio of at least 70% and a net NPA ratio below 3%, calculated on net advances. The manager must decide whether the branch met both targets and what action is needed.
1. Calculate the branch's total advances and CD ratio for 2024-25. Did it meet the 70% target?
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Closing advances for 2024-25:
- Home loans: 48 × 1.25 = ₹60 crore
- Vehicle loans: 32 × 1.10 = ₹35.2 crore
- Personal loans: 20 × 0.85 = ₹17 crore
- Total advances = 60 + 35.2 + 17 = ₹112.2 crore
Closing deposits: 160 × 1.125 = ₹180 crore
CD ratio = 112.2 / 180 = 0.6233 = 62.33%.
The target is at least 70%, so the branch did not meet it. To reach exactly 70%, advances would need to be 0.70 × 180 = ₹126 crore, a shortfall of ₹13.8 crore, assuming deposits stay unchanged.
2. Calculate the gross NPA ratio and the net NPA ratio. Interpret the result against the target.
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Gross NPA ratio = Gross NPA / Gross advances = 9.6 / 112.2 = 0.08556 ≈ 8.56%.
Net NPA = Gross NPA − provision = 9.6 − 3.2 = ₹6.4 crore.
Net advances = Gross advances − provision = 112.2 − 3.2 = ₹109 crore.
Net NPA ratio = 6.4 / 109 = 0.05872 ≈ 5.87%.
The target is a net NPA ratio below 3%. At 5.87%, the branch misses the target by a wide margin. Even though the provision reduces the net figure, the residual NPA is still too high relative to net advances. The branch needs recovery or upgrade of roughly enough NPAs to bring the ratio below 3%, not merely a higher provision.
3. If deposits remain unchanged, how much must advances increase to reach exactly 70%? If instead the branch wants to reach 70% by reducing deposits only, what deposit level would make the current advances exactly 70%?
Read the worked answer
Increase advances only: Required advances = 0.70 × 180 = ₹126 crore. Current advances = ₹112.2 crore. Required increase = 126 − 112.2 = ₹13.8 crore. This assumes the new advances do not add to NPAs and that deposits remain at ₹180 crore.
Reduce deposits only: Required deposits = Advances / 0.70 = 112.2 / 0.70 = ₹160.29 crore (approximately). Current deposits = ₹180 crore, so deposits would need to fall by 180 − 160.29 = ₹19.71 crore.
In practice, cutting deposits by ₹19.7 crore is harder to justify than adding good-quality advances, because deposits fund the branch's liquidity. The manager should prefer verified, performing advances while separately pursuing NPA recovery.