When looking to invest in a bank, whether through a term deposit or other instruments, most people make the mistake of looking only at the interest rate or the branch aesthetic. While a high rate is attractive, financial strength must be the priority. Ensuring your money is safe requires looking under the hood of the balance sheet to assess the institution’s actual stability. Before committing your hard-earned savings, here are the essential factors you should look for:
Profitability Over Size
Typically, the first thing people notice is the topline, which is the total size of deposits and advances. While a large business size is impressive, a size without profitability is a risk. If a bank is not generating adequate profit consistently, it cannot build the internal strength needed to protect its depositors.
Understanding NPAs in Advances and Investments
A crucial metric is the Non-Performing Assets or NPA, which refers to assets that have stopped generating income. A bank’s financial results indicate NPAs as gross NPAs and net NPAs. Net NPAs are gross NPAs less the amount of provision made against the same. The higher the amount of provision, the lower is the ratio of net NPAs, which in turn indicates a stronger financial health.
While reading gross NPAs in bank’s financials, one should ensure that there are no major written-off amounts while arriving at the gross NPA figure.
While 0% net NPA indicates a strong financial position as it means that the bank has already provided/absorbed 100% of the potential shocks that may arise out of NPAs, RBI’s various norms indicate that the net NPAs of a bank should be below 3%.
It is equally important to check if there are Non-Performing Investments. If a bank’s investments are classified as NPA, the bank will not fetch the value shown on the balance sheet, which weakens the safety net.
The Capital Shield and CRAR
The Capital to Risk Weighted Assets Ratio, or CRAR, ensures banks have sufficient capital to absorb losses and covers credit, market and operational risks. This figure indicates how solid the bank’s capital base is. While the RBI mandates 9% for non-AD 1 licence holder banks and 12% for AD 1 license holders, a strong bank stays well above these statutory requirements to ensure maximum depositor safety.
The Dividend Signal
Finally, a history of stable dividend distribution serves as one of the reliable indicators of an organisation’s robust financial health and long-term liquidity.
Making an informed choice today ensures a secure and prosperous tomorrow for your investments.
CA Shilpa Gadkari
DGM- Treasury, Budgeting & Mergers
TJSB Sahakari Bank Ltd