Accounting, Banking and Financial Management
This domain combines book-keeping fundamentals with bank regulation and basic financial management. Questions tend to be applied: classify an account, compute a ratio, or identify the regulatory limit that applies to a cooperative bank.
Accounting fundamentals
- Accounting equation: Assets = Liabilities + Capital; every transaction preserves it.
- Double entry: each debit has an equal credit. Golden rules - debit the receiver, credit the giver (personal); debit what comes in, credit what goes out (real); debit expenses and losses, credit incomes and gains (nominal).
- Sequence: journal → ledger → trial balance → trading and profit-and-loss account → balance sheet.
- Depreciation spreads the cost of a fixed asset; drawings are not an expense but a reduction of capital.
Banking and regulation
- CRR and SLR are reserve requirements; repo and reverse repo are liquidity management tools.
- An advance becomes a non-performing asset when interest or principal is overdue for more than 90 days; further classification is substandard, doubtful and loss.
- Priority sector lending is 40% of adjusted net bank credit for commercial banks, with sub-targets for agriculture and weaker sections.
- Cooperative banks are subject to RBI's capital adequacy norms (minimum CRAR of 9%) alongside their registering authority.
Worked example
A bank's total advances are ₹5,000 crore and gross NPAs ₹300 crore. Gross NPA ratio = 300 / 5,000 × 100 = 6%. Reasoning: the ratio is always computed against advances, not deposits, and 'gross' means before provisions - a provision deduction would give the net NPA ratio.
Traps
- Using deposits as the denominator in NPA ratios.
- Treating drawings or proprietor's personal expenses as business expenditure.
- Confusing CRR (cash with RBI) with SLR (approved securities held by the bank).
- Forgetting that a bank reconciliation statement explains timing differences, not errors alone.