Key Metrics to Evaluate a Bank’s Stability:

• Capital Adequacy Ratio (CAR):
• Measures a bank’s ability to absorb losses.
• Formula:
  [ \text{CAR} = (\text{Capital Reserves + Shareholder Funds}) / \text{Risk-Weighted Assets} ]
• Healthy CAR: Above 12% (Indian context).
• Red Flag: Lakshmi Vilas Bank had 0.17% as of June 2020.

• Gross NPA (GNPA) & Net NPA (NNPA):
• GNPA: Total percentage of loans gone bad.
  • Safe: Below 5%. Red Flag: Over 10%.
• NNPA: GNPA minus provisions set aside for bad loans.
  • Safe: Below 3%.
• Example:
  • GNPA = (?9 /90) = 10%.
  • NNPA = (?9 -3) /90 = 6.67%.
• LVB’s GNPA: 25.4% and NNPA: 9.64% in June 2020!

• Profitability and Revenue Trends:
• Check if the bank is consistently profitable and growing its revenues.
• Persistent losses can erode reserves and impact repayment ability.
• Example:
  • LVB’s share price fell from187 in 2017 to12 in 2020 due to continuous losses.
  • Contrast with stable, growing banks like HDFC, ICICI, or SBI.

• Prompt Corrective Action (PCA) List:
• What is PCA? RBI monitors banks with weak financial metrics.
• How to check: Google "[Bank Name] PCA" in the news section.
• Action Point: Avoid banks under PCA, as they face operational restrictions.

Practical Steps to Secure Your Deposits:

• Diversify Your Bank Accounts:
• Keep accounts in both private and public banks to reduce risk.
• Public banks (e.g., SBI) ensure access during crises like demonetization.

• Private banks (e.g., HDFC, ICICI) offer superior service.

• Prefer Systemically Important Banks (SIBs):

• Tagged as “too big to fail,” these banks are prioritized for RBI bailouts.

• Examples: SBI, HDFC, ICICI, Kotak.

• Limit Exposure:

• For HNIs, open accounts with 2-3 banks to avoid concentration risk.

• Monitor News:

• Keep an eye out for adverse reports, PCA listings, or declining metrics.

Limitations and Caveats:

• Manipulated Metrics:
• Indian banking audits can miss frauds for years. Numbers may be unreliable.
• Stay alert to sudden news or red flags.
• Example of Frauds:
• Punjab & Maharashtra Co-operative Bank (PMC) faced hidden bad loans worth6,500 crores.

Quick Checklist Before Choosing a Bank:

• CAR > 12%.
• GNPA < 5%; NNPA < 3%.
• Consistent profitability and revenue growth.
• Not under RBI’s PCA framework.
• Strong reputation and market cap (e.g., SBI, HDFC, ICICI).

To sum up:

Choose banks with strong fundamentals, diversify deposits across reliable institutions, and monitor red flags like NPAs or PCA listings. Be proactive to secure uninterrupted access to your funds.

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