Three measures to gauge a bank’s financial health

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MUMBAI: The Reserve Bank of India on tueday placed Lakshmi Vilas Bank under moratorium and announced its merging with DBS Bank. Withdrawals have been capped at ₹25,000 per depositors, with exceptions such as medical emergencies in which case the limit is ₹5 lakh per person. While such moratoriums are rare and come as a surprise, the bank’s financial parameters have been available in the public domain.

In this piece we look at what are the metrics to look for to gauge a bank’s financial health. These are metrics are easily available in quarterly results uploaded on a bank’s website.
Capital Adequacy Ratio
This data point captures the buffer a bank has against bad loans. When defaults happen, the losses are absorbed by the bank’s capital rather than that of depositors’ and this reading reveals the extent of the loss absorption capacity available with a lender.
“A ratio above 12% connotes a healthy bank. As per RBI norms, the minimum capital adequacy ratio has to be 9% for a scheduled commercial bank,” said Kirtan Shah, chief financial planner at Sykes and Ray Equities (I) Ltd., a mutual fund distributor. In the case of Lakshmi Vilas Bank, the unaudited results for July-September quarter revealed …

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