Question 1

Walk me through the three financial statements.

Accepted Answer

1) Income Statement (P&L): Shows profitability over a period. Revenue - COGS = Gross Profit - Operating Expenses = Operating Income (EBIT) - Interest - Tax = Net Income. Key metrics: Gross margin, operating margin, net margin. 2) Balance Sheet: Snapshot of financial position at a point in time. Assets = Liabilities + Equity. Current Assets (cash, receivables, inventory) + Non-current Assets (PP&E, intangibles). Current Liabilities (payables, short-term debt) + Long-term Liabilities + Equity. 3) Cash Flow Statement: Tracks actual cash movement. Operating (from business operations), Investing (capex, acquisitions), Financing (debt, equity, dividends). All three are connected: Net income flows to cash flow and retained earnings on balance sheet.

Question 2

What is DCF (Discounted Cash Flow) analysis?

Accepted Answer

DCF values a company based on the present value of its expected future cash flows. Steps: 1) Project Free Cash Flow (FCF) for 5-10 years. FCF = EBIT(1-tax) + D&A - CapEx - Change in Working Capital. 2) Calculate Terminal Value (perpetuity growth or exit multiple method). TV = FCF₁ × (1+g) / (WACC-g). 3) Discount all cash flows and TV back to present using WACC (Weighted Average Cost of Capital). WACC = (E/V)×Re + (D/V)×Rd×(1-T). 4) Sum = Enterprise Value. Subtract net debt = Equity Value ÷ shares = Price per share. Sensitivity analysis: Test different WACC and growth rate assumptions. DCF is fundamental to investment banking and equity research.

Question 3

Explain the difference between cash-based and accrual-based accounting.

Accepted Answer

Cash Basis: Revenue recorded when cash is received, expenses when cash is paid. Simple, shows actual cash position. Used by small businesses. Example: You deliver goods in December, customer pays in January → revenue recorded in January. Accrual Basis: Revenue recorded when earned (regardless of payment), expenses when incurred. Follows matching principle — match expenses to the revenue they help generate. Required by GAAP/IFRS for public companies. Example: Same scenario → revenue recorded in December (when goods delivered). Key difference: Timing. Accrual gives better picture of profitability; cash basis shows actual liquidity. Companies maintain both perspectives via Cash Flow Statement.

Question 4

What is NPA (Non-Performing Asset) in banking?

Accepted Answer

An NPA is a loan or advance where interest/principal payment remains overdue for more than 90 days (RBI definition). Classification: Sub-standard Assets: NPA for up to 12 months. Doubtful Assets: NPA for more than 12 months. Loss Assets: Identified as uncollectable by bank/auditors. Impact: Banks must provision (set aside funds) for NPAs — sub-standard (15%), doubtful (25-100%), loss (100%). High NPAs reduce profitability, restrict lending capacity, and erode capital adequacy ratio. India context: NPA crisis peaked in 2017-18. IBC (Insolvency and Bankruptcy Code) was introduced to resolve NPAs faster. GNPA ratio has improved from 11.2% (2018) to under 4% recently.

Question 5

Explain Basel III norms.

Accepted Answer

Basel III is a global banking regulation framework to strengthen bank capital requirements, liquidity, and risk management. Key requirements: 1) Capital Adequacy: Minimum CET1 (Common Equity Tier 1) = 4.5%, Tier 1 = 6%, Total Capital = 8% of Risk-Weighted Assets. Capital Conservation Buffer: Additional 2.5%. Countercyclical buffer: 0-2.5%. 2) Leverage Ratio: Tier 1 Capital / Total Exposure ≥ 3%. 3) Liquidity: LCR (Liquidity Coverage Ratio) — enough high-quality liquid assets to survive 30-day stress. NSFR (Net Stable Funding Ratio) — stable funding for 1 year. India: RBI has implemented Basel III with stricter requirements for systemically important banks (D-SIBs like SBI, ICICI, HDFC Bank).

Finance & Banking Interview Questions & Answers

Financial Analysis & Accounting

Banking & Risk Management

Key Tips for Finance & Banking Interviews