Banking Topics of interest
BANK PERFORMANC TERMINOLOGY
Burden efficiency ratio: i.e. Non-Intt. cost less non-intt. revenue divided by total business X 100. An increasing trend would show lack of burden bearing capacity.
Cash cover-age ratio i.e. cash divided by total business liabilities X 100. An increasing trend signifies presence of more of idle investments.
Non-perform-ing advances ratio i.e. non-performing advances divided by total or net advances X 100. An increasing trend implies gradual increase in bad credit portfolio.
Total business growth ratio i.e. current period’s business divided by last period’s business. An increasing trend shows improvement.
Priority sector ratio i.e. PS advances divided by total advances X 100. The ratio shows the advances mix.
Aggregate deposits are the total deposits of a bank at the close of the accounting year. These include deposits from public and deposits from banks. From a different angle, the aggregate deposits equal the total of all demand and time deposits. A high deposit figure signifies a bank’s brand equity, branch network and deposit mobilisation strength.
Average working funds (awf) The AWF at the beginning and at the close of an accounting year or at times worked out as fortnight or monthly average.
Working funds These are total resources (total liabilities or total assets) of a bank as on a particular date. Total resources include capital, reserves and surplus, deposits, borrowings, other liabilities and provision. A high AWF shows a bank’s total resources strength. There is a school of theory which maintains that working funds are equal to aggregate deposits plus borrowing. However, more pragmatic view in consonance with capital adequacy calculations is, to include all resources and not just deposits and borrowings.
Net profits are the profits net of provisions, amortization and taxes.
Operating profits Net profits before provisions and contingencies are called operating profits. This is an indicator of a bank’s profitability at the operating level.
Total debt Total debt equals total borrowings plus aggregate deposits. Total borrowings include borrowings in India and outside India. In turn, borrowings in India include borrowings from RBI, borrowings from other banks and borrowings from other institutions and agencies. It indicates a bank’s propensity to leverage its net worth.
Net worth This is aggregate of core equity capital and reserves and surplus. The net worth is tangible which is net of accumulated losses and unamortized preliminary expenses. It stands for the core strength of a bank and denotes a bank’s margin of safety, its cushion for all creditors and its base foundation.
Total debt to net worth The ratio is expressed as a number. The corresponding ratio in a manufacturing company is termed the debt-equity ratio. This ratio denotes a bank’s degree of leveraging, relative to its net worth. A higher ratio is proof of bank’s ability to leverage its net worth effectively.
Gross advances These include overdraft, bills purchased, cash credit, loans and term loans including food credit. From a different angle, aggregate advances include advances inside India and advances outside India. When the food credit is reduced from the gross advances, it amounts to non-food credit.
Invest-ments Investments include investments in government securities, shares, bonds, commercial papers and debentures and other approved securities.
Interest income The sum total of discount, interest from loans, advances and investment and from balance with RBI and other interest flows.
Interest income to average working funds Expressed as a percentage, this ratio shows a bank’s ability to leverage its average total resources in enhancing its main stream of operational interest income.
Non-interest income This is other income of a bank. It includes items such as exchange commission, brokerage, gains on sale and revaluation of investments and fixed assets and profits from exchange transactions.
Non-interest income to average working funds This ratio denotes a bank’s ability to earn from non-conventional sources. In a liberalized environment, this ratio assumes significance. For, it mirrors a bank’s ability to take full advantage of its operational freedom.
Operating expenses Equals the non-interest expenses. The operating expenses to AWF ratio explains the overall operational efficiency of a bank. In fact, this ratio is one of the indictors of profitability of a bank.
Interest spread This is the excess of total interest earned over total interest expended. The ratio of interest spread to AWF shows the efficiency of bank in managing and matching interest expenditure and interest income effectively. Interest spread is critical to a bank’s success as it exerts a strong influence on its bottom line.
Net spread is an alternative term for operating profit in the banking industry. The net spread to AWF ratio reveals a lot about the overall operational efficiency of a bank.
Risk weighted assets The cumulative risk weighted value of assets plus risk weighted credit converted contingent liabilities, which is used as the denominator for computing the capital adequacy ratio of bank.
Adjusted capital to risk weighted assets ratio It reckons the unimpaired capital (net of net NPAs) available with the bank to mitigate potential adverse impact of credit, market and operational risk.
Net profit to awf The ratio is a foolproof indicator of excellent utilization of resources and optimum leveraging of funds.
Net profit to net worth The ratio is equivalent of the return on net worth ratio used in other industries. It is indicator of profitability and return on shareholders’ funds.
Operating profits to net worth This is a corollary to NP/NW ratio and is another indicator of shareholders’ return.
Capital adequacy ratio This ratio relates a bank’s core net worth to its risk-weighted assets. The ratio is internationally accepted risk-driven measure of a bank’s degree of capitalization. A higher ratio indicates that a bank is well capitalized vis-a-vis its perceived risks. It is an excellent indicator of a bank’s long term solvency.
Risk adjusted net interest margin is refinement of net intt. margin which factors into provisions made against loan losses. RANIM represents NII, net of provisions for probable loan losses as a percentage to total earning assets.
Business is equal to aggregate deposits plus aggregate advances.
Equity multiplier measures financial leverage and represents both a profit and risk measurement. It compares assets with equity and large values indicate a large amount of debt financing in comparison to equity. It has impact on return on assets. A critical scrutiny of EM helps to evaluate whether capital support is proportionate to the risks assumed in the balance sheet.
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