Run a one-year recession scenario on a bank's corporate and retail books. Compute stressed credit losses and the post-stress CET1 ratio, and say what the static result hides.

Stressed credit losses are Rs 2,150 crore and the CET1 ratio falls from 12.0% to about 10.1%. Pre-provision profit of Rs 1,200 crore absorbs over half the losses, so capital falls by Rs 950 crore. The bank stays above an illustrative 9.5% requirement but uses 76% of its cushion, and if downgrades lift risk-weighted assets by 8% the ratio drops to about 9.35%, below it. It passes the static test with little to spare.

A household planning for a bad year does not just trim its income estimate; it also adds the bills that only arrive in bad years, the repair, the medical cost, the month without work. A stress test adds the losses that only arrive in a recession. Each book's loss is exposure times default rate times loss given default. Corporate: Rs 40,000 crore x 5% x 55% = Rs 1,100 crore. Retail: Rs 25,000 crore x 7% x 60% = Rs 1,050 crore. Together Rs 2,150 crore, against Rs 810 crore in a normal year.

Notice which book moves more. Retail losses rise 2.3 times because only the default rate changes. Corporate losses rise 3.06 times because the default rate rises 2.5 times and loss given default rises from 45% to 55% at the same time, as the factories and property behind the loans are worth less in a recession. When two inputs that multiply each other both rise, the loss rises by the product, not the sum.

Run the year in order. Pre-provision profit is the first line of defence: it is earned before credit losses are charged, and it adds 2.40 points of ratio. Corporate losses take 2.20 points and retail losses 2.10. The ratio ends at 10.10%, above the 9.5% requirement, but the cushion above it shrinks from 2.50 points to 0.60, so the recession uses 76% of it. In plain money, Kanchor started with Rs 1,250 crore of capital above its requirement and ends with Rs 300 crore.

Both simplifications flatter the bank. In a recession, borrowers are downgraded, and lower ratings carry higher risk weightsThe percentages applied to each loan to turn it into risk-weighted assets; riskier borrowers carry higher weights, so a downgrade raises the capital a loan needs.. If risk-weighted assets rise by 8%, the same Rs 5,050 crore of CET1 is a ratio of 9.35%, below the 9.5% requirement. Pre-provision profit also tends to fall as loan growth slows and fees dry up; if it falls by a quarter, the ratio ends at 9.50%, exactly on the requirement, even with RWA flat. The static result is the best case of the scenario, not its central case.

So the judgement has two halves. Kanchor passes the test as specified, and it does not need emergency capital. But it would pass with so little margin, and fail under realistic second-round effects, that the board should agree its management actions now: which dividend it would cut, how far it would slow loan growth, and at what ratio it would raise capital. A stress test earns its keep by setting those triggers before the recession, when they are cheap to agree, rather than during it.