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Is your bank safe? These 8 financial ratios can help you find out

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The collapse of Yes Bank has meant hardship for its customers. Facing a Rs 50,000 withdrawal limit, they have been lining up at ATMs and bank branches. While indications are that Yes Bank depositors will likely make it out safely, more such episodes cannot be ruled out. Many banks are facing financial stress. “Yes Bank isn’t a first, it certainly would not be the last,” states a note by ASK Wealth Advisors.

This is worrisome, though whenever a bank fails, the RBI steps in to protect customers. Typically, the RBI arranges for a stronger bank to take over the ailing bank. In 2004, Global Trust Bank was taken over by the Oriental Bank of Commerce. Similarly, United Western Bank merged with IDBI Bank in 2006 and ICICI Bank took over Bank of Rajasthan in 2010. In all cases, depositors got their money back.

Yes Bank customers too will have a soft landing. The government has okayed a restructuring plan. Still, the whole episode should serve as a wake-up call for bank customers. Kalpesh Ashar, Founder, Full Circle Financial Planners and Advisors, says, “The premise that all banks offer a safe haven has been completely turned on its head.” We outline a safety blueprint by listing out the tell-tale signs of an impending crisis.

Spot the warning signs
There is no smoke without fire. Several signs can alert you when a bank is in trouble. “The writing was on the wall for Yes Bank for several months,” says Raj Khosla, Founder and Managing Director, MyMoneyMantra. Customers who heeded the early warning signs could have avoided a financial pickle.

NPAs

Net-NPAs

PCR

If the bank has delayed earnings releases or if the auditor has resigned or made an adverse comment, find out why. Yes Bank’s auditor sought a fresh audit last November after complaints were leveled by a whistleblower about irregularities in the bank. The bank has not yet declared its December quarter earnings even though the deadline has long passed.

capital-adequacy

CASA-ratio

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. Two board members had stepped down from Yes Bank board as early as November 2018, prompting Moody’s to downgrade its ratings citing concerns over corporate governance.

Beyond this, monitoring some basic operating metrics of a bank can give you a fair idea of its health, points out Adhil Shetty, CEO, Bank Bazaar. 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.

credit-deposit-ratio

NIM

RoA

Ascertain if the bank is properly capitalised by checking its capital adequacy ratio. A low CAR suggests the bank’s net worth may be eroding. Keep an eye on the Current Account Savings Account (CASA) ratio. A lower CASA ratio indicates that the bank relies on costlier institutional borrowings to fund its operations. The credit-deposit ratio of a bank is another indicator you can track. A higher credit-deposit ratio suggests an overstretched balance sheet, and may also hint at capital adequacy issues. These are some parameters that bank customers should monitor regularly to avoid a shock later. As a start, see the tables of the best and worst banks on a slew of metrics.

Compiled by ETIG Database Source: Capitaline
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