Banking & Financial Ratios: Quick Revision for Exams, Credit Appraisal and Interviews
Structured preparation resources for India's competitive examinations.
Acadvik Banking & Financial Ratios Quick Revision — a practical revision guide for banking exams, credit appraisal, financial statement analysis and banking interviews. Learn each ratio through its formula, interpretation and common appraisal caution. Always use the latest applicable RBI/SBI/loan-policy instructions and the borrower’s audited financials for actual credit decisions.
1. Banking fundamentals
CRAR / Capital Adequacy Ratio = eligible regulatory capital ÷ risk-weighted assets × 100. It indicates the capital buffer available against risk-weighted exposures. The applicable minimum and buffers depend on the institution, regulatory framework and current directions; do not memorise a single figure without context.
CASA ratio = current-account and savings-account deposits ÷ total deposits × 100. A higher CASA share can lower funding cost, though actual cost also depends on deposit pricing and customer mix.
Credit–Deposit (CD) ratio = credit outstanding ÷ deposits × 100, subject to the specific reporting convention. It indicates how much of the deposit base is deployed as credit, but it is not by itself a measure of asset quality or profitability.
Cost-to-income ratio = operating expenses ÷ operating income × 100. Lower can indicate better operating efficiency, but compare banks with consistent definitions and consider technology, scale and one-off items.
2. Profitability and capital ratios
| Ratio | Common formula | How to interpret | Appraisal caution |
|---|---|---|---|
| ROA | Net profit ÷ average total assets × 100 | Profit generated per unit of assets. | Check whether the denominator is average or closing assets and use consistent periods. |
| ROE | Net profit ÷ average shareholders’ equity × 100 | Return earned on owners’ funds. | High leverage can lift ROE while increasing risk. |
| NIM | Net interest income ÷ average interest-earning assets × 100 | Spread-based earning performance. | Bank disclosures may define the denominator differently. |
| CRAR | Regulatory capital ÷ risk-weighted assets × 100 | Capital adequacy against risk-weighted exposures. | Use regulatory capital definitions, not simple balance-sheet net worth. |
| Leverage | Use the stated debt/equity or regulatory leverage definition | Shows reliance on borrowed funds or exposure relative to capital. | Never compare ratios without checking what is included in debt and equity. |
3. Asset quality, provisioning and liquidity
GNPA ratio is commonly gross NPAs as a percentage of gross advances; NNPA ratio uses net NPAs relative to net advances under the applicable reporting definition. GNPA reflects gross stressed advances, while NNPA takes eligible provisions and adjustments into account. Do not subtract a generic provision figure yourself unless the official definition specifies the components.
Provision Coverage Ratio (PCR) broadly indicates provisions held against NPAs, but published definitions can differ in treatment of technical write-offs and other adjustments. Always state the definition being used.
Credit cost is commonly credit-related impairment/provisions charged during a period relative to average advances or another stated exposure base. Verify the denominator used by the bank. Expected Credit Loss (ECL) is a forward-looking impairment approach under the relevant accounting framework; it is not identical to an NPA ratio.
LCR assesses whether a bank has sufficient high-quality liquid assets to meet projected net cash outflows over a 30-day stress period, under regulatory rules. It is a short-term liquidity measure, not a profitability ratio.
4. Credit appraisal and working-capital ratios
| Ratio / measure | Typical formula | Use in appraisal | Watch-out |
|---|---|---|---|
| Current ratio | Current assets ÷ current liabilities | Broad short-term liquidity indicator. | Inventory quality and receivable ageing matter; a high ratio is not automatically healthy. |
| Quick ratio | (Current assets − inventory − other less-liquid items as defined) ÷ current liabilities | Tests liquidity excluding less-liquid current assets. | Apply the policy definition consistently. |
| Debt-equity ratio | Defined debt ÷ tangible net worth or equity, as specified | Shows financial leverage. | Clarify treatment of unsecured loans, quasi-equity and related-party balances. |
| Interest coverage | EBIT ÷ interest expense, commonly | Capacity to service interest from operating earnings. | Use consistent EBIT and interest definitions; assess volatility and cash flow too. |
| DSCR | Cash available for debt service ÷ scheduled principal and interest | Repayment capacity for term debt. | Cash-flow and debt-service definitions vary by appraisal format; disclose assumptions. |
| NWC / TCA | Net working capital ÷ total current assets × 100 | Shows the proportion of current assets funded by long-term sources. | Negative NWC can indicate pressure, but interpret with business model and operating cycle. |
| Inventory + receivables / (sundry creditors + bank finance) | Use the exact CMA / bank-prescribed definition | Can help assess current-asset funding structure. | Do not treat this as a universal standalone ratio; verify the prescribed CMA format and denominator. |
Working-capital discipline: analyse stock statements, ageing of debtors, creditors, drawing power, margins, inventory holding days, receivable days, payable days and the operating cycle together. A ratio should prompt questions—not replace verification of primary records.
5. Worked examples
Example A — Current ratio: Current assets ₹120 lakh and current liabilities ₹80 lakh. Current ratio = 120 ÷ 80 = 1.50:1. This is a calculation, not an automatic sanction decision; examine stock and debtor quality, ageing and business cycle.
Example B — Interest coverage: EBIT ₹30 lakh and interest expense ₹10 lakh. Interest coverage = 30 ÷ 10 = 3.0 times. Check whether earnings are sustainable and whether principal repayments are separately covered.
Example C — ROA: Net profit ₹12 lakh and average assets ₹400 lakh. ROA = 12 ÷ 400 × 100 = 3%. For bank comparisons, use consistent reported definitions and periods.
Example D — Fiscal vs bank ratios: A bank’s CRAR is not the same as a borrower’s current ratio. CRAR compares regulatory capital with risk-weighted assets; current ratio compares current assets with current liabilities.
6. Practice MCQs
- A bank’s cost-to-income ratio rises, with income unchanged. What is the most direct interpretation?
Answer: Operating expenses have risen relative to operating income, suggesting weaker cost efficiency, all else equal. - Which ratio is most directly associated with capital available against risk-weighted exposures?
Answer: CRAR. - A company has current assets of ₹150 lakh and current liabilities of ₹100 lakh. What is its current ratio?
Answer: 1.5:1 (150 ÷ 100). - Why can ROE rise even when underlying operating performance does not improve?
Answer: A smaller equity base or greater leverage can increase ROE, so leverage and risk must also be reviewed. - Which measure focuses on 30-day stressed net cash outflows under regulatory assumptions?
Answer: Liquidity Coverage Ratio (LCR). - Is a high current ratio always proof of strong liquidity?
Answer: No. Slow-moving inventory, overdue receivables or inaccurate valuation can weaken real liquidity. - What is the key difference between GNPA and NNPA?
Answer: NNPA reflects eligible provisions/adjustments under the applicable reporting rules, whereas GNPA is gross of those adjustments.
7. Interview-ready answer framework
When asked about any ratio, answer in four steps: (1) formula, (2) what it measures, (3) what a high/low value may imply, (4) limitations and corroborating checks. For a credit proposal, connect ratios with cash-flow projections, account conduct, audited statements, stock/debtor ageing, contingent liabilities, repayment schedule, security and applicable sanction policy. Avoid concluding “good” or “bad” from one ratio alone.
Revision task: Pick one borrower’s anonymised financials and calculate current ratio, debt-equity, interest coverage, DSCR and NWC/TCA. Write one sentence on what each ratio tells you and one limitation. Do not upload customer-identifiable or confidential banking data to public tools.
8. Official references and disclaimer
- Reserve Bank of India — current regulatory directions, banking statistics and financial stability publications.
- State Bank of India — public disclosures and annual reports.
- Ministry of Corporate Affairs — applicable company-law and financial-reporting material.
Disclaimer: This is educational revision material, not an official SBI instruction, regulatory interpretation, audit opinion or credit sanction recommendation. Ratio formulas and reporting definitions may vary by regulatory framework, accounting policy, institution and CMA format. For live credit decisions, use current RBI directions, bank circulars, prescribed formats and verified borrower documents.