Mudra Compass

Recent speculations around the functioning of RBL Bank, RBI has too released a statement that everything at RBL Bank is well functioning, and it has adequate capital and financial position of the bank remains satisfactory. So, there is no need for depositors and stakeholders to react to such rumors.

Earlier in 2020, we have seen that the RBI had to step in to replace the board of directors at Yes Bank and also announced that customers of Yes Bank can only withdraw up to Rs. 50000 from their savings and deposit accounts. So, it is obvious to customers and stakeholders to stress out in any kind of speculation. But RBI has also stated that RBL bank has maintained comfortable capital adequacy ratio, provision coverage ratio and liquidity coverage ratio. Here we are giving some observations which make depositors feel safe about their money and also decode the meaning of ratios mentioned herein above.

Capital Adequacy Ratio

As per the RBI norms, the minimum capital adequacy ratio that banks must maintain is around 10%. However, most banks maintain capital much higher than that. This is calculated by dividing available capital by the risk weighted assets; the balance sheet assets of banks (loans given by banks and other investments) are assigned certain risk weights. Banks must maintain minimum capital funds at a prescribed ratio so that it is able to absorb any losses incurred from these assets. So, higher the ratio, the better it is.

Provision Coverage Ratio

When the borrowers default on their loan repayments for 90 days or more, the bank classifies that loan as a non-performing asset (NPA). Thus, higher NPA ratio is one of the warning signs of the weak asset quality of the bank. To avoid getting impacted by such NPAs, banks are advised to build up provisioning—to set aside some amount—in good times, when the profits are good, which can be used for absorbing losses in a downturn. It usually depends on the bank. But generally, anything above 50-60% is considered decent in terms of provision coverage ratio. One can use Provisioning Coverage Ratio (PCR), which is essentially the ratio of provisioning to gross non-performing assets. This indicates the extent of funds a bank has kept aside to cover loan losses.

Liquidity Coverage Ratio

To assess whether the bank can withstand cash outflows in stressed conditions, the Basel Committee, an international committee formed to develop standards for banking regulation, had introduced Liquid Coverage Ratio (LCR) as part of post Global Financial Crisis (GFC) reforms.

It requires banks to maintain High Quality Liquid Assets (HQLAs) to meet 30 days net outgo under stressed conditions. It is calculated by dividing HQLAs to total net cash outflows over the next 30 calendar days. Indian banks are required to maintain LCR of 100%. Anything higher is a positive.

Note that not all banks may provide this information periodically.

Your money is guaranteed by DICGC

Mostly do not have an idea about the DICGC.DICGC (Deposit Insurance and Credit Guarantee Corporation) is subsidiary of RBI and your deposits up to Rs 1 lakh in any combination of savings and deposits with any commercial bank are insured by the Deposit Insurance and Credit Guarantee Corporation. So, in the circumstances, whether commercial or cooperative banks face challenges, your money up to Rs. 1 lakh is safe. Moreover, this limit was hiked to Rs 5 lakh from April 1, 2020, following the announcements to that effect by Finance Minister Nirmala Sitharaman in her Union Budget 2020 speech. Hence, your savings and deposits up to Rs. 5 lakh will be insured by the DICGC. 

Pay attention to your bank’s ongoing

Trust is necessary, but blind trust can toll on you for your money. So, do not just sit after depositing your money into the bank. As an aware depositor, always keep your eyes on the bank with their current ongoing. Is it in the news? Why was it in the news? How much are its NPAs? Who are the bank’s biggest stakeholders? Who are its biggest borrowers? Is it profitable in recent quarters? If not, what were the reasons for and the extent of its losses? How is its share price performing? How does it compare to its peer banks? How is the corporate governance at the bank? Have there been instances of fraud at the bank? When you walk into your bank branch, what do you learn from the bank’s employees?

Remember there is nothing like risk-free banking, there is always some kind of risk associated with whether government or private, small or big, seen or unforeseen so, it is necessary to pay your attention to every activity in which your bank is involved. These are all few things you can take care of while evaluating your bank’s stability.

Diversify your bank

Like you do not keep all your money in one place, you should also not keep your money in one bank. Based on an assessment of your bank’s risks, you may divide your holdings among multiple banks. Keep balance between banks, for instance when you are keeping your money with small or cooperative banks, you should also consider keeping some funds in large government owned banks or large private banks as they are more stable.