Financial health of bank

Financial health of bank

Subject: Economy

Context: The Yes Bank episode was the latest in the series. The bank’s fall is yet another reminder for customers to know better, such as not putting all their life’s savings in a single spot and keeping an eye out on the activities and performance of the institution unto which they entrust their hard-earned money.

​ Concept:

• Gross non-performing assets (NPAs): They indicate how much of a bank’s loans are in danger of not being repaid. If interest is not received for 3 months, a loan turns into NPA. A very high gross NPA ratio means the bank’s asset quality is in very poor shape
• Net NPAs. The net NPA is that portion of bad loans which has not been provided for in the books.Net NPA is a better indicator of the health of the bank.
• Capital adequacy ratio: It is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities. This is a measure of a bank’s ability to meet its obligations. A high CAR means the bank can absorb losses without diluting capital.
• CASA ratio, It is the proportion of current account and savings account deposits in the total deposits of the bank.A low CASA ratio means the bank relies heavily on costlier wholesale funding, 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 ratio 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.NIM will be high for banks with higher low-cost deposits or high lending rates. Low NIM and high NPA is a bad combination.
• Return on assets, it shows how profitable a bank’s assets are in generating revenue.A lower RoA means that bank is not able to utilise assets efficiently. Negative RoA implies the bank’s assets are yielding negative return.
• 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 asset quality issues have been taken care of and the bank is not vulnerable.
• A Provisioning Coverage Ratio or PCR is the percentage of funds that a bank sets aside for losses due to bad debts. A high PCR can be beneficial to banks to buffer themselves against losses if the NPAs start increasing faster. Provision Coverage Ratio = Total provisions / Gross NPAs