Provisioning norms
Sub-standard, secured: 15% of outstanding
Sub-standard, unsecured: 25% of outstanding
Doubtful: 100% x (outstanding - realisable value of security)
Loss: 100% of outstanding, and write off
Any provisioning question. The two traps: 25% not 15% when the exposure is unsecured, and for doubtful assets the uncovered portion only, with the security valued on a realistic basis.
- realisable value
- What the security would actually fetch, estimated realistically, where the bank has valid recourse
NPA ratios
Gross NPA ratio = Gross NPAs / Gross Advances x 100
Net NPAs = Gross NPAs - Provisions
Net Advances = Gross Advances - Provisions
Net NPA ratio = Net NPAs / Net Advances x 100
Provision coverage ratio = Provisions / Gross NPAs x 100
Any asset-quality question. Provisions come off the numerator and the denominator of the net ratio; deducting them from the top only overstates the ratio.
- Provisions
- Amount already set aside to cover potential loan losses
- Net NPA
- The actual burden on the bank after provisions and recoveries
Capital adequacy ratio
CAR = (Tier I capital + Tier II capital) / RWA
Minimum under Basel I: 8%
Capital needed for a target ratio = target x RWA
RWA allowed at a target ratio = capital / target
Capital questions, including how much capital to raise or how much RWA to shed to reach a target. Moving exposure from a 100% weight to a 0% weight cuts RWA rupee for rupee.
- Tier I
- Core capital: stock issues and declared reserves
- Tier II
- Supplementary capital: investment gains, long-term debt over five years, hidden reserves; not short-term unsecured debt