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How to see if a bank is risky for placing your deposits?
Although Lakshmi Vilas Bank is being sold to and recapitalised by a well to do Bank (DBS Bank), you do not want to be their depositor now for the inconvenience it causes. (1/18)
Although Lakshmi Vilas Bank is being sold to and recapitalised by a well to do Bank (DBS Bank), you do not want to be their depositor now for the inconvenience it causes. (1/18)
This is a basic guide to avoid such situations. Read on!
Number 1. Check your Bank’s capital adequacy ratio
Suppose a bank raised a deposit of ₹100. They are supposed to set aside ₹10 and lend the remaining ₹90. If the banks owners contribute ₹5, (2/18)
Number 1. Check your Bank’s capital adequacy ratio
Suppose a bank raised a deposit of ₹100. They are supposed to set aside ₹10 and lend the remaining ₹90. If the banks owners contribute ₹5, (2/18)
then their CAR would be (10+5)/90 = 16.66%
This is a gross simplification but you get the idea. A Healthy number is to be above 12%.
LVB’s CAR was at 0.17% as on 30th June 2020!!
Number 2: Check their gross NPA(GNPA) & net NPA (NNPA) ratio
Coming back to our example, (3/18)
This is a gross simplification but you get the idea. A Healthy number is to be above 12%.
LVB’s CAR was at 0.17% as on 30th June 2020!!
Number 2: Check their gross NPA(GNPA) & net NPA (NNPA) ratio
Coming back to our example, (3/18)
if a bank lent ₹90 rupees and ₹9 went sour, then they have a GNPA of (9/90) = 10%. A good bank should be below this and below 5% is considered to be very safe (in the Indian context)
LVB had a GNPA of 25.40% as on 30th June 2020! (4/18)
LVB had a GNPA of 25.40% as on 30th June 2020! (4/18)
This bank had more red flags than the communist party.
In our example, if a bank set aside ₹3 from their profits as a provision (meaning they will use this money to set good their losses from their NPAs) then their NNPA is (9-3)/90= 6.67%. (5/18)
In our example, if a bank set aside ₹3 from their profits as a provision (meaning they will use this money to set good their losses from their NPAs) then their NNPA is (9-3)/90= 6.67%. (5/18)
A good bank would have it under 3%. (Ideal ratios are subject to change depending on the current state of the economy)
LVB had a NNPA of 9.64% on 30/06/2020.
Number 3. Check your bank’s quarterly numbers trend
LVB’s share price touched a peak of ₹187.19 on 14/07/2017. (6/18)
LVB had a NNPA of 9.64% on 30/06/2020.
Number 3. Check your bank’s quarterly numbers trend
LVB’s share price touched a peak of ₹187.19 on 14/07/2017. (6/18)
Now it is at ₹12.45.
Contrast it with HDFC which is creating shareholder value year on year. Both the income and profits of HDFC Bank are increasing.
It is well and good to note this because share price is nothing but people’s perception. (7/18)
Contrast it with HDFC which is creating shareholder value year on year. Both the income and profits of HDFC Bank are increasing.
It is well and good to note this because share price is nothing but people’s perception. (7/18)
As long as people perceive a bank is good, your money is safe even if the bank is actually having troubles. Once people get afraid and start to withdraw their money, trouble starts.
Number 4. (8/18)
Number 4. (8/18)
See if your bank is in the RBI’s Prompt corrective action(PCA) framework list
If you find it too much to follow all this, RBI does most of the work for you. RBI places banks who are weak on the first three parameters in a watchlist called PCA. (9/18)
If you find it too much to follow all this, RBI does most of the work for you. RBI places banks who are weak on the first three parameters in a watchlist called PCA. (9/18)
1)A well to do Private Bank & 2) well capitalised public bank.
During a crisis like demonetisation, it was the public banks that worked the most to distribute fresh cash as RBI would have prioritised them first (I was in SBI then and witnessed this first hand). (11/18)
During a crisis like demonetisation, it was the public banks that worked the most to distribute fresh cash as RBI would have prioritised them first (I was in SBI then and witnessed this first hand). (11/18)
My first choice for a PSB will be SBI since it’s tagged as systemically important and also it is the biggest PSB by market cap and meets all other parameters mentioned above.
I’d also have a private bank in order to get faster service, (12/18)
I’d also have a private bank in order to get faster service, (12/18)
thereby enjoying the best of both worlds. I’d pick the nearest branch from the likes of HDFC, ICICI, Kotak or Axis (I chose ICICI since I work at ICICI now, not much of a choice actually but it still is the nearest to my house anyway )
If I were to become a HNI one day, (13/18)
If I were to become a HNI one day, (13/18)
I’d open a third bank account( in order to reduce concentration risk) with another well to do private bank and my choice would be HDFC Bank today.
By market cap, HDFC is the leader followed by Kotak and ICICI among private banks.
For public sector, (14/18)
By market cap, HDFC is the leader followed by Kotak and ICICI among private banks.
For public sector, (14/18)
it is SBI followed by PNB and IDBI.
Note: Some banks are tagged systemically important or too big to fail. Basically it means RBI will bail them out if they ever screw up. (15/18)
Note: Some banks are tagged systemically important or too big to fail. Basically it means RBI will bail them out if they ever screw up. (15/18)
I have not put this as my criteria because my first priority is to ensure I have uninterrupted access to my money. I don’t want to wait a couple of months and then get my money back like they did for YES Bank.
This list is by no means comprehensive. (16/18)
This list is by no means comprehensive. (16/18)
I’m planning to write a more comprehensive one for my blog later on but it contains the most important ones in my opinion.
This post was written by u/leucyne on Reddit! (17/18)
This post was written by u/leucyne on Reddit! (17/18)
