Assessing the health of your bank an article in Economics times
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*By Lisa Mary Thomson, ET Bureau*
This is a typical nightmare sequence these days. You see an endless line of
people spilling out of the bank, anxiously withdrawing their deposits and
carrying money away in bags and suitcases.
In a fit of worry, you join the line. But when you reach the front, the cash
teller tells you they have stopped dispensing cash. In shock, you wake up,
thankfully to realise that it was only a dream.
There are numerous rumours that are going around about whether Bank A or
Bank B is on a shaky ground. You're wondering if you're making the biggest
mistake by not taking your money out.
But before you take any hasty step, remember that you need to base your
decision on something other than rumour. While this may be slightly tedious,
SundayET tells you what you need to know to assess whether your bank is
safe.
When it comes to assessing the health of a bank, it's important that you
take both qualitative and quantitative aspects into account as weakness in
one area could easily be compensated by strength in another segment.
"Qualitative factors would include franchise, quality of underwriting,
diversification of portfolio, exposure to sensitive segments, business risk
profile, management, systems and the operating environment while
quantitative factors are profitability, capital adequacy, asset liability
mismatches (liquidity), asset quality, and size," says Vibha Batra, co head,
financial sector ratings, ICRA.
There are a number of organisations within the country such as Crisil, ICRA
and CARE, among others, which are involved with the process of rating
institutions, including banks on multiple parameters.
Different scales are created which depict credit quality keeping long-term,
medium-term and short-term instruments in mind. For instance, in the ICRA
long term rating scale, the highest rating LAAA would signify the lowest
credit risk while the lowest rank LD would signal low prospect of recovery.
The simplest option available for individuals is to check the rating of a
specific financial institution with these rating agencies, most of which is
available on their websites. A scale explaining the ratings generally
accompany the information.
If your fear and curiosity cannot be satiated without research on your own
part, then you could take some of the following ratios into account:
*Non-Performing Asset Ratio*
The non-performing asset ratio shows the extent to which a bank's assets are
unproductive. It is the ratio of all non-performing assets (where repayment
of loans or interest is unpaid after 90 days of the specified time period)
out of the loans disbursed and is hence an indicator of asset quality and
the credit risk of the bank.
"You could check both the gross NPA ratio and the net NPA ratio. However,
the lower the ratio is, the better position your bank is in," says Batra.
*Capital Adequacy Ratio*
The capital adequacy ratio (CAR) of the bank is the ratio of its total
capital (this includes tier 1 and tier 2 capital) to risk adjusted assets.
This assures that banks will be able to withstand a certain degree of losses
before becoming insolvent.
As per the dictates of the RBI, the minimum CAR is 9%. "However, banks in
India are generally well-capitalised. Moreover, if there are banks with a
CAR of less than 12%, the government has assured that they will help them
bring it up to at 12%," says Raman Oberoi, senior director, Crisil Ratings.
Many people have an impression that if the bank is bigger, the chances of
its staying afloat are greater and to a great extent this is true.
"Scale is an advantage to the bank as it gives them an edge in technology
absorption and diversification benefits. Further, a larger size of capital
enhances the loss absorption capacity. Big banks could lead to systemic risk
and therefore may get greater support from the government in the event of
stress," says Batra.
But in terms of viewing share price as an indicator of stability, experts
feel that this is often a false indicator and does not reflect the
fundamentals of the bank. "However, share price or market capitalisation can
be pointers to future capital raising ability of the bank," admits Dogra.
Also, while banks guarantee up to Rs 1 lakh in case of a crisis affecting
the bank, this is the total amount you will get irrespective of whether you
have one or five accounts in the same bank.
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With best wishes
SC Batra
email. [EMAIL PROTECTED]
[EMAIL PROTECTED]
Tele 0044-777-417-9668 (Mob)
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