Under RBI's resolution framework for financial stress, what is the key trigger for invoking prompt corrective action (PCA) for a bank?
AWhen net profit declines by 10% YoY
BWhen capital ratio falls below specified thresholds or when net NPA exceeds 6%
CWhen operating expenses exceed 50% of operating income
DWhen return on assets becomes negative for a quarter
Correct Answer:
B. When capital ratio falls below specified thresholds or when net NPA exceeds 6%
EXPLANATION
RBI's PCA framework is triggered when a bank's capital ratio, asset quality (Net NPA > 6%), or profitability metrics breach specified thresholds. This is designed to protect financial stability.
Analyze the quarterly data: A bank's Advances grew 14% QoQ while Deposits grew 8% QoQ. If this trend continues, which regulatory metric is most at risk?
AReturn on Equity (ROE)
BLoan-to-Deposit ratio and liquidity coverage metrics
CGross NPA ratio
DCost-to-Income ratio
Correct Answer:
B. Loan-to-Deposit ratio and liquidity coverage metrics
EXPLANATION
Advances growing faster (14%) than deposits (8%) will increase LTD ratio unsustainably and strain liquidity metrics. If continued, it could breach LCR and NSFR requirements, risking regulatory non-compliance.
A bank reports Floating Rate Advances of ₹1,50,000 crore and Fixed Rate Advances of ₹90,000 crore. If rates rise by 200 bps, what is the repricing benefit compared to a bank with 60% floating rate portfolio?
AThe first bank benefits more due to higher floating rate exposure
BBoth banks benefit equally regardless of floating rate mix
CThe second bank (60% floating) would benefit more
DCannot be determined without deposit repricing data
Correct Answer:
A. The first bank benefits more due to higher floating rate exposure
EXPLANATION
First bank has 62.5% floating rate (150,000/240,000), second bank has 60%. First bank will capture more repricing benefit when rates rise as more of its portfolio reprices upward, enhancing net interest income.
Examine the comparative data: Bank A has NPA ratio of 1.8% with provision coverage of 72%, Bank B has NPA ratio of 2.2% with provision coverage of 68%. Which bank has better asset quality indicators in terms of net NPA?
ABank A with 0.50% net NPA
BBank A with 0.35% net NPA
CBank B with 0.70% net NPA
DBoth banks are equivalent
Correct Answer:
B. Bank A with 0.35% net NPA
EXPLANATION
Net NPA = GNPA × (1 - Provision Coverage). Bank A: 1.8% × (1 - 0.72) = 1.8% × 0.28 = 0.504% ≈ 0.50%. Bank B: 2.2% × 0.32 = 0.704% ≈ 0.70%. Bank A is better
Study the multi-year data: CAR in FY2022: 13.2%, FY2023: 13.8%, FY2024: 14.5%. If RWA increased by 18% from FY2023 to FY2024, what is the percentage change in capital?
A18.5%
B21.2%
C24.8%
D28.3%
Correct Answer:
C. 24.8%
EXPLANATION
CAR = Capital/RWA. 14.5% = Capital / (RWA×1.18). If FY2023 CAR was 13.8%, capital must have grown at: 14.5/13.8 × 1.18 = 1.248 = 24.8% growth
A bank's Effective Interest Rate (EIR) on advances is 9.2% and on deposits is 4.1%. If advances constitute 65% of total earning assets and deposits form 75% of total liabilities, calculate the approximate Net Interest Spread (NIS).
A4.1%
B4.8%
C5.1%
D5.8%
Correct Answer:
C. 5.1%
EXPLANATION
NIS = (Yield on Advances × Advances % / Total Assets) - (Cost of Deposits × Deposits % / Total Liabilities). Simplified: 9.2% - 4.1% = 5.1% as basic spread
Analyze the stress test data: Under the baseline scenario, a bank's CRAR is 12.5%. Under the adverse scenario (with 200 bps slippage in NPA), the CRAR drops to 10.8%. What is the impact on capital adequacy?
A170 bps decline, still above minimum threshold
B170 bps decline, below Basel III minimum
C200 bps decline, above Basel III minimum
D220 bps decline, significantly below threshold
Correct Answer:
A. 170 bps decline, still above minimum threshold
EXPLANATION
Decline = 12.5% - 10.8% = 1.7% = 170 bps. 10.8% is still above Basel III minimum CRAR of 10.5%