Risk Management
Risk types
This domain tests identification and control of banking risks. Credit risk is loss from borrower default; market risk arises from interest rates, forex, and prices; operational risk comes from people, processes, systems, and external events; liquidity risk is inability to meet obligations; reputation and strategic risks also matter. Banks use limits, diversification, collateral, covenants, and monitoring. Capital adequacy under Basel norms is measured by the capital-to-risk-weighted-assets ratio (CRAR).
Asset quality
An advance is a non-performing asset (NPA) when interest or principal is overdue for more than 90 days. NPAs are classified as substandard, doubtful, and loss, with provisioning. Early warning signals include irregular overdrafts, delayed stock statements, and frequent cheque returns. Recovery tools include restructuring, legal action, and asset sales.
Worked example
A term loan instalment is due on 1 April and remains unpaid on 10 July. Reasoning: the account is overdue for more than 90 days by 10 July, so it is classified as an NPA. The bank must recognise the impairment, make provisioning, and follow the classification and recovery process. The exact days are counted from the due date, not from the sanction date.
Traps
Do not use 180 days for NPA classification. Do not confuse CRAR with CRR. Do not say collateral eliminates credit risk. Do not ignore operational risk from fraud and system failure.