Banking Terms And Ratios To Decide On Their Performance

For every industry there are some of the parameters based on which their performance can be judged, likewise banking industry which forms the economic backbone of any country has several facets to it that are of high importance. Some of these factors can even come as a help if you want to participate in their growth story:

1. NPAs:

This is the most common term heard in respect of a bank and underlines about the banks' asset quality. Asset for the bank are the loans that it has disbursed and the interest it is likely to earn on them. Nonetheless, there can be various reasons owing to which these assets can turn out to be non-performing for a bank. Under the NPA, there are GNPAs which are computed as a percentage of the total loans that will become non-recoverable. So, such banks are often deemed as poor and it may be advisable to not park one's deposits into such bank as the bank may at some point in time may be in a situation where it can also default, though commercial banks in India have been always rescued from any such occurrence by the Reserve Bank of India.

Net Non-performing assets:

These are NPAs against which the bank has not created any provisions and is computed as thus: NNPA = GNPA - NPA Provisions. This another words is arrived at by deducting or reducing provisions in respect of unpaid debt from Gross NPA.

2. Provision Coverage Ratio or PCR

There are instances when bank after a period of time considers or arrives at a consensus that some of its loan accounts may not be in a position to pay back and for these they set aside some funds which is referred to as provisioning. And this ratio if over 70 percent suggest that bank is better placed to deal with default on its loan accounts. This indeed points out to the fact that the bank shall not be vulnerable to any huge deviation in case of loan accounts.

3. Standard or Sub-standard assets:

As per the RBI, this is an account that does not discloses any of the problems and does not carry more than normal risk linked to the business. This cannot be an NPA. Now with effect from March 31, 2005 an asset would be classified as sub-standard if it remained NPA for a period less than or equal to 12 months.

4. Capital Adequacy Ratio

This ratio is stipulated by the apex bank i.e. the RBI and is defined as ratio of the bank capital to the total credit it has disbursed or has exposure into. By maintaining this requirement, the bank will be able to meet its obligations in future course without taking on to its primary capital or in other words diluting its capital.

 In accordance with the RBI rules, scheduled commercial banks need to comply with CAR requirement of 9 percent while PSBs need to maintain  a CAR of 12%.  

 

5. NII and NIM:

Net Interest Income and Net Interest Margin: These are two financial performance indicator wherein NIM tells about the profit they make and this is primarily a differential they earn on lending out the amount i.e. they earns on loans and interest they need to pay on the deposits.

Typically banks with high NIM are good as they incur a lower cost for realisation of profits.

NII on the other hand is  the difference between the revenue generated from a bank's assets which offer interest and expenses incurred while paying for the liabilities which involve interest pay out.