Know your Bank
There are some parameters that bank customers should monitor regularly to avoid a shock later.
Gross Non-performing assets
- NPA’s indicate how much of a bank’s loan are in danger of not being repaid. If interest is not received for 3 months, a loan turn into NPA.
- A very high gross NPA ratio means the bank’s asset quality is in very poor shape.
Net Non-performing Asset
- Banks provide for some loans going bad. The net NPA is that portion of bad loans which has not been provided for in the books.
- Net NPA is the better indicator of the health of the bank.
Provisioning Coverage Ratio
- Banks usually set aside a portion of their profits as a provision against Bad Loans.
- A high PCR ratio (Ideally above 70%) means most assets qualify issues have been taken care of and the bank is not vulnerable.
Capital Adequacy Ratio
- It’s a ratio of a Bank’s capital in relations to its risk weighted assets and current liabilities.
- This is a measure of a bank’s ability to meet its obligations. A high Capital Adequacy Ratio means the bank can absorb losses without diluting capital.
- Ascertain if the bank is properly capitalised by checking its capital adequacy ratio. A low Capital Adequacy Ratio suggests the bank’s net worth may be eroding.
CASA Ratio
- It is the proportion of current account and savings account deposits in the total deposits of the bank.
- A low Current Account and Saving Account ratio means the bank relies heavily on costlier institutional borrowings to fund its operations, which can hurt its margins.
Credit Deposit Ratio
- This shows how much a bank lends out of its deposits or how much of its core funds are used for lending.
- A high credit-deposit suggests an overstretched balance sheet, and may also hint at capital adequacy issues.
Net Interest Margin
- This is the difference between interest earned by a bank on loans and the interest it pays on deposits.
- Net interest margin will be high for the banks with higher low-cost deposits or high lending rates. Low net asset margin and high non-performing assets is a bad combination.
Return on Assets
- It shows how profitable a bank’s assets are in generating revenue.
- A low return on assets means that bank is not able to utilise assets efficiently. Negative return on assets implies the bank’s assets are yielding negative return.
There is no smoke without fire. Several signs can alert you when a bank is in trouble.
- If the bank has delayed earnings releases or if the auditor has resigned or made an adverse comment, find out why?
- Watch out for exit of key managerial personnel as it may be a signal that trouble is brewing within the bank.
- Also monitor any rating downgrades by credit rating agencies. Beyond this, monitoring some basic operating metrics of a bank can give you a fair idea of its health.
- All listed banks provide financial statements on their websites, giving a break up of various performance metrics. Asset quality is a key monitorable. If your bank’s net NPAs exceed 5%, it shows bad lending practices. Ensure that your bank provisioning coverage ratio does not dip below 65-70%. The bank will struggle to remain solvent if its bad loans have to be written off.
Are your Fixed Deposit safe?
Reserve Bank of India (RBI) has made deposit insurance compulsory for all banks. Your investment in a bank is insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme, which covers your deposits up to Rs. 5 lakhs for both principal and interest amount held in the same capacity and same right as on the date of liquidation/cancellation of bank’s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force. So, even if the bank you have an FD in goes insolvent, your money would be safe.
- The DICGC while registering the banks as insured banks furnishes them with printed leaflets for display giving information relating to the protection afforded by the Corporation to the depositors of the insured banks. In case of doubt, depositor should make specific enquiry from the branch official in this regard.
- If you have deposits with more than one bank, deposit insurance coverage limit is applied separately to the deposits in each bank. The deposit insurance scheme is compulsory and no bank can withdraw from it.
- The Corporation may cancel the registration of an insured bank if it fails to pay the premium for three consecutive periods. In the event of the DICGC withdrawing its coverage from any bank for default in the payment of premium the public will be notified through newspapers.
- If a bank goes into liquidation, DICGC is liable to pay to the liquidator the claim amount of each depositor upto Rupees five lakhs within two months from the date of receipt of claim list from the liquidator.
