Credit and Risk Management
Core concepts
Credit work starts with appraisal: character, capacity, capital, collateral and conditions, supported by ratio analysis (DSCR, debt–equity, current ratio, working capital cycle) and a credit bureau report. Limit setting uses exposure ceilings and the large exposure framework; pricing uses risk-adjusted return on capital.
Basel III measures capital against risk-weighted assets: Common Equity Tier 1 of at least 4.5%, Tier 1 of 6% and total capital of 8% of RWA, plus a capital conservation buffer of 2.5%, giving 11.5% in the Indian framework. Liquidity is covered by the LCR (a 30-day stressed outflow test on high-quality liquid assets) and the NSFR (a one-year stable funding test).
Risk taxonomy: credit, market (interest rate, FX, equity, commodity), operational (people, process, systems, external events), liquidity, and reputational or strategic risk. Asset classification runs on days past due: SMA-0 (1–30), SMA-1 (31–60), SMA-2 (61–90), and non-performing beyond 90 days.
Traps
The favourite trap is asking for capital as a percentage of total assets instead of RWA. Another is mixing provisioning rates - substandard 15%, doubtful 25–40%, loss 100% - with the small general provision on standard assets. LCR is a stock test; NSFR is a funding-structure test. Do not confuse collateral value with repayment capacity.
Worked example
Capital ₹900 crore against RWA ₹10,000 crore gives CRAR = 9%. That clears the 8% minimum and, if all of it is equity, the 4.5% CET1 test - but it falls short of 11.5% including the conservation buffer, so the bank faces restrictions on distributions.