Bank Balance Sheet and Key Ratios: CASA, NIM, CD Ratio

The correct answer is C, deposits of customers. A deposit is money the bank owes back to the depositor, so it is a claim on the bank and is shown under liabilities in Form A of the Third Schedule to the Banking Regulation Act, 1949, along with capital, reserves and surplus, borrowings and other liabilities and provisions. Deposits are normally the largest liability of a commercial bank.

Option A, advances, is wrong because a loan is money owed to the bank and therefore its asset. Option B, investments in government securities, is also an asset; banks hold such approved securities partly to meet the statutory liquidity requirement under Section 24. Option D, cash balances with the Reserve Bank, is an asset too, even though the cash reserve ratio compels the bank to keep it. Candidates who think in the depositor's language, that the money is theirs and the loan is the bank's, invert both sides; the balance sheet is written from the bank's point of view.

The correct answer is B, current account and savings account deposits. CASA is short for current account and savings account, and the CASA ratio is current plus savings deposits divided by total deposits, shown as a percentage. It matters because a current account earns the depositor no interest and a savings account only a low rate, so these are a bank's cheapest funds; a high CASA ratio lowers the cost of deposits and widens the spread.

Option A describes cash reserves and statutory liquidity holdings, which belong to the assets side and are governed by the cash reserve ratio and Section 24 of the Banking Regulation Act, not by CASA. Option C, capital and surplus, is the owners' stake and is used in the capital adequacy ratio. Option D invents a lending ratio; the share of advances in deposits is the credit-deposit ratio, a different measure altogether. The trap in this question is reading the letter C as credit or cash instead of current.

The correct answer is B, interest earned minus interest expended. Net interest income, written as NII, is the core earning of a bank: the interest it collects on advances and investments less the interest it pays on deposits and borrowings. Expressed against average earning assets it becomes the net interest margin, the ratio examiners pair with it.

Option A, total income minus operating expenses, leaves interest paid inside the figure and mixes in fee and treasury income, so it describes neither net interest income nor operating profit correctly. Option C reverses the order of the profit and loss account: provisions and contingencies are deducted from operating profit to reach net profit, so net profit minus provisions is not a defined figure. Option D subtracts the wrong expense, operating expenses such as salaries and rent, from interest earned; those expenses belong to the cost-to-income ratio. Remember that net interest income counts only interest on both sides, and other income is kept separate.

The correct answer is B, total advances by total deposits. The credit-deposit ratio, usually written as the CD ratio and given in per cent, shows how much of every hundred rupees of deposits a bank has lent out. A low ratio points to idle funds and lost interest income, while a ratio above a hundred per cent means lending exceeds deposits and the gap is being filled by borrowings.

Option A inverts the formula and gives the deposit-credit ratio, which is not the measure the question names; an inverted option is the commonest distractor in this chapter. Option C uses risk-weighted assets, the denominator of the capital to risk-weighted assets ratio, which measures capital adequacy and not deployment of deposits. Option D, net profit over deposits, is a profitability idea closer to return on assets. Remember also that under the Lead Bank Scheme banks are expected to keep a credit-deposit ratio of at least sixty per cent in rural and semi-urban branches.

The correct answer is C, the Third Schedule. Section 29 of the Banking Regulation Act, 1949 requires every banking company to prepare, as on the last working day of its accounting year, a balance sheet and a profit and loss account in the forms set out in the Third Schedule to the Act. Form A of that Schedule is the balance sheet and Form B is the profit and loss account, which is why bank accounts across India look alike and can be compared ratio by ratio.

Option A, the First Schedule, and Option D, the Fourth Schedule, do not carry these forms. Option B, the Second Schedule, is the familiar trap, but the Second Schedule that matters to banking is in the Reserve Bank of India Act, 1934: a bank listed in it is called a scheduled bank. Candidates mix the two Acts, so fix the pair in memory as forms in the Third Schedule of the Banking Regulation Act, scheduled banks in the Second Schedule of the Reserve Bank of India Act.

The correct answer is C, 90 days. Under the income recognition and asset classification norms followed by banks in India, a term loan becomes a non-performing asset when interest or an instalment of principal remains overdue for more than ninety days. The same ninety-day rule is applied, in its own form, to cash credit and overdraft accounts that stay out of order and to crop loans through the season rule.

Option A, thirty days, and Option B, sixty days, describe an account that is merely overdue; such an account is flagged as a special mention account, so that the bank acts before it slips, but it is still a standard asset. Option D, a hundred and eighty days, is the old Indian norm, replaced when the ninety-day international practice was adopted, and it survives only in stale study material. After the ninety-day mark the account is sub-standard for twelve months, doubtful thereafter, and a loss asset when no recovery is expected.

The correct answer is C, 9 per cent. The capital to risk-weighted assets ratio, or CRAR, is Tier 1 plus Tier 2 capital divided by risk-weighted assets, and the Reserve Bank of India requires Indian scheduled commercial banks to keep it at a minimum of nine per cent, with a capital conservation buffer of 2.5 per cent of risk-weighted assets held on top of it in common equity.

Option B, eight per cent, is the Basel minimum set by the Basel Committee on Banking Supervision; the Indian requirement is deliberately one percentage point stricter, and this pair is the favourite trap of the chapter. Option A, six per cent, is close to the Tier 1 figures in the framework but is not the total requirement. Option D, twelve per cent, is higher than the norm and belongs to no rule, although many large banks do report a ratio above it. Risk weights are why the denominator is not simply total assets: a government security carries far less weight than an unsecured loan.

The correct answer is B, bank guarantees issued on behalf of customers. A guarantee becomes a payment only if the customer fails to perform, so it is not added to the totals of the balance sheet; Form A shows guarantees, letters of credit, acceptances and forward exchange contracts separately as contingent liabilities, and bills for collection appear as a contra item. These exposures still carry risk, which is why they attract capital charges and are watched by supervisors.

Option A, term deposits, is a certain liability on the balance sheet itself. Option C is wrong because a drawn cash credit limit is an advance and sits among assets; only the undrawn portion is an off-balance-sheet commitment. Option D, government securities, is an ordinary asset held partly for the statutory liquidity requirement. The examiner tests the idea of a liability that may or may not arise, so read the word contingent as conditional on default.

The correct answer is B, 12 months. Asset classification moves in steps. An account that stays overdue beyond ninety days becomes a non-performing asset and is first called sub-standard; once it has remained sub-standard for more than twelve months it is reclassified as doubtful, and it is called a loss asset when the bank or its auditors or the inspection find it irrecoverable, whether or not some salvage value remains.

Option A, six months, and Option C, eighteen months, belong to no stage of this ladder and are offered because they sound like plausible supervisory periods. Option D, thirty-six months, is wrong as a trigger, although the doubtful category is itself divided by age, up to one year, one to three years and more than three years, with rising provisioning. The practical point for the exam is that provisioning rises at every step, which is why classification, not merely recovery, decides a bank's reported profit.

The correct answer is B, 30 days. The liquidity coverage ratio asks a bank to hold enough unencumbered high-quality liquid assets, mainly cash, balances with the central bank and government securities, to survive thirty calendar days of a severe stress scenario without fresh funding. The ratio is to be maintained at a hundred per cent or more, which means the stock of such assets must at least equal the estimated net outflow of those thirty days.

Option A, seven days, is too short and matches no Basel standard. Option C, ninety days, borrows the number from the non-performing asset rule and is the trap here. Option D, one year, is the horizon of the companion standard, the net stable funding ratio, which compares available stable funding with required stable funding over a year and is also kept at a hundred per cent. Pair the two in memory: liquidity coverage for thirty days of stress, net stable funding for a year of structure.