JAIIB AFM Ratio Analysis (Day 3): The Complete 2026 Formula + Banks in India
JAIIB AFM ratio analysis is one of the highest-scoring yet most under-prepared parts of the Accounting. Finance for Bankers paper. If you can read a balance sheet.
Plug numbers into the right formula. You can bank these marks almost every single attempt. This is Day 3 of our 15-day JAIIB AFM study plan.
Fully rebuilt for the 2026 exam cycle.
Today you will lock down two big chapters: Ratio Analysis (Module C). Banks in India and Their Activities (Module D). Plus principal books of accounts and bank disclosures.
We keep every formula. Add solved examples. Comparison tables and a clear study routine so nothing slips through.
Key Takeaways (read this first)
- Ratios connect two financial variables from the Balance Sheet or P&L to judge performance.
- There are seven families: liquidity. Solvency, efficiency, profitability, market prospect, leverage and coverage ratios.
- Quick Ratio excludes inventory and prepayments; the Current Ratio includes them. Ideal current ratio is 2:1.
- India's banking system spans commercial. Cooperative, development, regional rural, small finance and payment banks.
- Numericals are free marks in AFM — practise formulas until plug-and-play.
Why Ratio Analysis Dominates the JAIIB AFM Exam
The AFM paper rewards candidates who can calculate, not just memorise. Ratio analysis sits at the heart of that. Examiners love it because one short balance-sheet extract can test liquidity. Solvency and profitability in a single case-style question.
For bankers, this is not abstract theory. Every loan appraisal. Every working-capital assessment and every credit rating leans on these exact ratios. So the chapter doubles as real job skill and exam scoring. Learn it once, use it for your whole career.
Before we dive in, bookmark our mock tests for timed practice and our free guides for the rest of the 15-day series. Now, the core topic.
Day 3 Topics at a Glance
- Ratio Analysis — liquidity, solvency, efficiency, profitability, market prospect, leverage and coverage ratios
- Banks in India and Their Activities. Types of banks and functions of commercial banks
- Principal Books of Accounts — the master records every bank maintains
- Bank Disclosures — what banks must reveal in their financial statements
What Is Ratio Analysis? A Simple Definition
Ratio analysis is the study of the relationship between two or more financial variables. Those variables come from the Balance Sheet or the Profit. Loss Account. In plain terms. A financial ratio is a mathematical comparison between two accounts or categories.
Why bother? Because raw numbers mislead. A profit of Rs 10 lakh sounds great until you learn the firm has Rs 50 crore in assets.
Ratios add context. They help investors. Creditors.
Management see how well a business performs and spot weak areas early.
The 7 Types of Financial Ratios
For JAIIB AFM, financial ratios split into seven main families. Learn the buckets first; the formulas follow naturally.
- Liquidity Ratios — short-term ability to pay bills
- Solvency Ratios — long-term ability to pay debt
- Efficiency (Activity) Ratios — how well assets are used
- Profitability Ratios — ability to earn profit
- Market Prospect Ratios — investor-facing return signals
- Financial Leverage Ratios — reliance on borrowed funds
- Coverage Ratios — ability to service interest and fixed charges
1. Liquidity Ratios
Liquidity ratios measure whether a company can pay its current liabilities as they fall due. And whether it can turn other assets into cash for upcoming obligations. They reveal the firm's short-term cash health.
The three most commonly tested in JAIIB are:
- Quick Ratio (Acid Test Ratio)
- Current Ratio (Working Capital Ratio)
- Times Interest Earned Ratio
Quick Ratio (Acid Test Ratio)
The quick ratio shows whether a company can pay current liabilities using only quick assets. Quick assets are current assets convertible to cash within 90 days: cash. Cash equivalents, short-term investments, marketable securities and current accounts receivable.
Formula 1: Quick Ratio = (Cash + Cash Equivalents + Short-Term Investments + Marketable Securities + Accounts Receivable) / Current Liabilities
Formula 2 (alternative): Quick Ratio = (Current Assets &minus. Inventory − Advances − Prepayments) / Current Liabilities
Quick Ratio: Solved Examples
Example 1. M/s Raj &. Co's balance sheet shows Cash Rs 10,000. Accounts Receivable Rs 5,000. Inventory Rs 5,000; Stock Investments Rs 1,000; Prepaid Taxes Rs 500; Current Liabilities Rs 15,000.
Quick Ratio = (10,000 + 5,000 + 1,000) / 15,000 = 16,000 / 15,000 = 1.07
Example 2 (alternative formula). Same firm: Total Current Assets Rs 21,500. Inventory Rs 5,000; Prepaid Taxes Rs 500; Current Liabilities Rs 15,000.
Quick Ratio = (21,500 − 5,000 − 500) / 15,000 = 16,000 / 15,000 = 1.07
Example 3. XYZ Pvt Ltd as on 31st March (in Lakhs):
| Item | Amount (Lakhs) |
|---|---|
| Cash in hand | 25 |
| Cash in bank | 50 |
| Short-term investments | 45 |
| Inventory | 25 |
| Receivables | 100 |
| Current Liabilities | 160 |
Quick Ratio = (25 + 50 + 45 + 100) / 160 = 220 / 160 = 1.375
Notice inventory (25) is left out of the numerator. That single habit is what separates a correct answer from a wrong one.
Current Ratio (Working Capital Ratio)
The current ratio measures a company's ability to pay short-term obligations using all current assets. Unlike the quick ratio, it includes inventory and prepaid assets.
Formula: Current Ratio = Current Assets / Current Liabilities
A current ratio of 2:1 is considered ideal. Below 1, the firm may struggle to meet short-term dues. Far above 2, it may be sitting on idle assets.
Example. XYZ Co (in Crores): Current Assets = 25,200; Current Liabilities = 14,700.
Current Ratio = 25,200 / 14,700 = 1.71
Quick Ratio vs Current Ratio: The Comparison You Must Memorise
| Point | Quick Ratio | Current Ratio |
|---|---|---|
| Also called | Acid Test Ratio | Working Capital Ratio |
| Inventory included? | No | Yes |
| Prepayments included? | No | Yes |
| Strictness | Stricter liquidity test | Broader liquidity test |
| Ideal benchmark | 1:1 (commonly cited) | 2:1 |
2. Solvency Ratios (Leverage Ratios)
Solvency ratios measure a company's ability to meet long-term obligations. They focus on capital structure and the level of debt financing.
- Debt-to-Equity Ratio = Total Debt / Shareholders' Equity
- Interest Coverage Ratio = EBIT / Interest Expenses
A high debt-to-equity ratio signals heavy borrowing and higher risk. A healthy interest coverage ratio shows the firm earns enough to comfortably pay its interest.
3. Profitability Ratios
Profitability ratios measure a company's ability to generate earnings relative to its revenue. Assets or equity. These are the ratios shareholders watch most closely.
| Ratio | Formula |
|---|---|
| Gross Profit Ratio | Gross Profit / Net Sales × 100 |
| Net Profit Ratio | Net Profit / Net Sales × 100 |
| Return on Assets (ROA) | Net Profit / Total Assets × 100 |
| Return on Equity (ROE) | Net Profit / Shareholders' Equity × 100 |
4. Activity (Efficiency) Ratios
Activity ratios. Also called efficiency ratios. Measure how well a company uses its assets to generate revenue. Faster turnover usually means tighter, smarter operations.
- Stock Turnover Ratio = Cost of Goods Sold / Average Inventory
- Debtors Turnover Ratio = Net Credit Sales / Average Accounts Receivable
- Asset Turnover Ratio = Net Sales / Total Assets
5, 6 & 7. Market Prospect, Leverage and Coverage Ratios
The remaining three families round out the picture. Market prospect ratios (like earnings per share. Dividend yield) signal returns to investors.
Financial leverage ratios show how far a firm relies on borrowed money. Coverage ratios test whether earnings can comfortably cover interest. Other fixed charges.
For exact thresholds and any latest treatment. Always confirm on the latest official IIBF notification. Since AFM phrasing can be updated between cycles.
Banks in India and Their Activities
Understanding India's banking structure is essential for the JAIIB AFM exam. Theory questions on types of banks. The functions of commercial banks appear almost every attempt. And they are quick marks.
Types of Banks in India
| Type of Bank | Examples / Description |
|---|---|
| Commercial Banks | SBI, PNB, HDFC, ICICI — accept deposits and give loans |
| Cooperative Banks | Urban Co-operative Banks, State Co-operative Banks |
| Development Banks | NABARD, SIDBI, NHB — long-term finance for specific sectors |
| Regional Rural Banks (RRBs) | Serve rural and semi-urban areas |
| Small Finance Banks | Basic banking for underserved segments |
| Payment Banks | Accept limited deposits. No lending (confirm the current deposit cap on the latest official IIBF notification) |
Functions of Commercial Banks
- Accepting deposits — savings, current, fixed and recurring
- Granting loans and advances — the core lending business
- Agency functions — collection of cheques, payment of bills
- General utility services — lockers, foreign exchange, letters of credit
- Credit creation — expanding money supply through the money multiplier effect
Principal Books of Accounts
The principal books maintained by businesses. Banks form the backbone of every financial statement. Know each one by its job.
- General Ledger: the master book holding all accounts — assets. Liabilities, income and expenses
- Profit. Loss Ledger: records income and expenditure to determine net profit or loss
- Personal Ledgers: subsidiary ledgers for debtors and creditors
- Cash Book: records all cash receipts and payments. Acts as both a journal and a ledger
How to Study Day 3 (A Practical 3-Hour Routine)
Theory alone will not clear AFM. Use this simple block to turn reading into recall.
- Hour 1 — Formulas: write each ratio formula by hand twice. Group them by family so the logic sticks.
- Hour 2 &mdash. Solved examples: redo all three quick-ratio examples. The current-ratio example without looking. Re-derive, don't re-read.
- Hour 3 — Theory + test: revise bank types and books of accounts, then attempt a timed set of mock tests on ratio analysis.
End the day by explaining the quick-vs-current difference out loud. If you can teach it in one sentence, you own it.
Common Mistakes to Avoid in Ratio Analysis
- Adding inventory to the quick ratio. The whole point of the acid test is to exclude it.
- Mixing up numerator and denominator. Liabilities go on the bottom for liquidity ratios — always.
- Forgetting “average” in turnover ratios. Use average inventory or average receivables, not the closing figure.
- Ignoring units. Lakhs, crores and thousands must match before you divide.
- Memorising without practising. Numericals reward speed; build it with timed drills.
Frequently Asked Questions (FAQ)
What is the difference between Quick Ratio and Current Ratio?
The Current Ratio includes all current assets (inventory. Prepaid expenses included) in the numerator. While the Quick Ratio excludes inventory and prepaid expenses. The Quick Ratio is therefore a stricter measure of short-term liquidity.
What is an ideal Current Ratio for a company?
A current ratio of 2:1 is generally considered ideal. Meaning current assets are twice the current liabilities. The ideal level still varies by industry. So judge it against sector norms.
What are activity ratios used for?
Activity ratios. Also called efficiency ratios. Measure how well a company uses its assets to generate revenue. Common examples include inventory turnover, debtors turnover and asset turnover.
What is the role of NABARD?
NABARD (National Bank for Agriculture. Rural Development) is a development bank that provides long-term finance. Refinance to agriculture and rural development. It also supports the supervision of cooperative banks and RRBs.
What topics should I focus on for Day 3 of JAIIB AFM preparation?
Prioritise ratio analysis (especially current and quick ratios with solved examples). The types of banks in India and their functions. And the principal books of accounts. These are high-frequency areas in the JAIIB AFM exam.
Conclusion: Make Day 3 Your Scoring Day
Day 3 of the JAIIB AFM 15-day plan hands you some of the easiest marks in the paper. Master the quick ratio and current ratio with worked examples. Memorise the profitability and efficiency formulas. And keep the banking structure of India crisp in your head.
Do the formulas by hand. Redo every solved example, and finish with timed practice. Confirm any figures.
Caps or thresholds on the latest official IIBF notification before exam day. Then walk in knowing ratio analysis is yours. You've got this.
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