InvestorQ : How do I know that my bank is safe and is financially stable?
Kalyani Sundaram made post

How do I know that my bank is safe and is financially stable?

Answer
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Dawn Cherian answered.
7 months ago


I totally understand the concern one has after the falling of the YES Bank, people want to be safe and when it comes to money, they just want to be sure whether or not it is in the right hands. Even though when the bank fails, the RBI steps in to protect investors.

The first thing that you need to know is to assess the warning signs and there are several signs that could alert you when a bank is in financial trouble.  Here are a few things to look out at:

Gross Non-Performing Assets: NPA indicates how much of a bank’s assets are in the risk of not being paid and a high gross NPA ratio indicates that the bank’s asset quality is in poor shape.

Net NPA: Net NPA is that portion of NPAs which have not been provided in the books. This ratio more accurately represents the health of the bank.

Provisioning Coverage Ratio: Higher the PCR ratio, the less vulnerable your bank is. This ratio simply means that how much of their profits have been kept by banks as a provision against bad loans.

Capital Adequacy Ratio: This ratio represents the bank’s capital in relation to risk-weighted assets and current liabilities. Higher the CAR, better the bank, as this simply means that the bank has the higher ability to meet out its obligations and can absorb losses without hurting the base capital.

Current Account and Savings account deposits Ratio: It represents the ratio of current account deposits and saving account deposits to the total deposits of the bank. Higher the CASA ratio, the better the bank. A lower ratio means that the bank relies majorly on wholesale funding, which can simply hurt the margin of the bank.

Credit deposit ratio: A high credit ration represents an overly stretched balance sheet and may also show that there are capital adequacy issues. This ratio shows how much of a bank’s core assets are used in lending.

Net interest margin: This is the difference between interest paid by the bank on its deposits and interest earned by a bank on loans. The worst combination would be lower NIM and higher NPA. 

Return on assets: This represents how profitable can be the assets of the bank in generating revenues. Lower ROA means that the bank is unable to utilize its assets in an efficient manner.

You can check out your bank’s financial ratios to see how efficient your bank is performing and do not forget to understand the audited balance sheet and any adverse remarks made by the auditor in his report.