Check the financial health of your bank with

these 8 ratios
Updated: 01 Apr 2020, 01:08 PM IST

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Is your bank safe?

Banking and financial institutions in India have been showing signs of trouble, it is no
surprise. Many of them have come crashing down, creating a crisis-like sitation for customers
and investors. 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.
Even though when a bank fails, the RBI steps in to the rescue of customers, customers
themselves can track several warning signs that show that their bank is in trouble. Monitoring
some basic operating metrics of a bank can give you a fair idea of its health. Here are eight
such metrics or ratios for you to check.
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Gross non-performing assets (NPAs)

What this is: NPAs 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.

What it means: A very high gross NPA ratio means the bank’s asset quality is in very poor
shape
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Net NPAs
What this is: 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.

What it means: Net NPA is a better indicator of the health of the bank.
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Provisioning coverage ratio

What this is: Banks usually set aside a portion of their profi ts as a provision against bad
loans.

What it means: A high PCR ratio (ideally above 70%) means most asset quality issues have
been taken care of and the bank is not vulnerable.
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Capital adequacy ratio

What this is: It is the ratio of a bank’s capital in relation to its risk weighted assets and
current liabilities.

What it means: 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.
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CASA ratio
What this is: It is the proportion of current account and savings account deposits in the total
deposits of the bank.

What it means: A low CASA ratio means the bank relies heavily on costlier wholesale
funding, which can hurt its margins
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Credit-deposit ratio
What this is: This shows how much a bank lends out of its deposits or how much of its core
funds are used for lending.

What it means: A high credit-deposit ratio suggests an overstretched balance sheet, and may
also hint at capital adequacy issues.
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Net interest margin

What this is: This is the difference between interest earned by a bank on loans and the
interest it pays on deposits.

What it means: NIM will be high for banks with higher low-cost deposits or high lending
rates. Low NIM and high NPA is a bad combination.
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Return on assets
What this is: it shows how profitable a bank’s assets are in generating revenue.

What it means: A lower RoA means that bank is not able to utilise assets effi ciently.
Negative RoA implies the bank’s assets are yielding negative return.