Banking Regulation, Capital Adequacy & Risk Management — Practice

Question 1

What is RBI's minimum CRAR requirement for Indian banks?

Accepted Answer

9%.

Question 2

After how many days overdue does a loan account become an NPA?

Accepted Answer

More than 90 days.

Question 3

Which risk type covers a borrower's failure to repay a loan?

Accepted Answer

Credit risk.

Question 4

What is the effective well-capitalised CRAR threshold for an Indian bank, once the Capital Conservation Buffer is included?

Accepted Answer

11.5% (9% minimum CRAR + 2.5% Capital Conservation Buffer).

Question 5

An NPA has been non-performing for 8 months. Which sub-category does it fall into?

Accepted Answer

Sub-standard (NPA for up to 12 months).

Question 6

Name two restrictions RBI can impose on a bank placed under Prompt Corrective Action.

Accepted Answer

Any two of: limits on branch expansion, restrictions on dividend payments, curbs on certain lending categories, or management-related restrictions in severe cases.

Question 7

Explain, with an example, why a bank can be solvent yet still fail.

Accepted Answer

Solvency means assets exceed liabilities (positive net worth); liquidity is the ability to meet short-term obligations in cash. A bank can hold assets worth more than its liabilities but still be unable to convert them to cash quickly enough to meet a sudden large deposit outflow — this is a liquidity crisis distinct from insolvency, and it can cause a bank to fail even while technically solvent on paper.

Question 8

Why does RBI set a separate CET1 minimum (5.5%) above and beyond the overall CRAR requirement, rather than letting banks self-allocate capital quality within the total CRAR figure?

Accepted Answer

CET1 is capital's highest-quality, most loss-absorbing layer (predominantly common equity and retained earnings). Setting a separate CET1 floor ensures a meaningful share of a bank's total capital is genuinely loss-absorbing, rather than allowing banks to meet the overall CRAR requirement using lower-quality capital instruments that absorb losses less reliably.

Practice — Banking Regulation, Capital Adequacy & Risk Management

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