Banks | Infomerics Ratings

RATING METHODOLOGIES-BANKS

The rating methodologies developed by Infomerics for evaluation of banks comprise of qualitative and quantitative factors, the details of which are described below. The Qualitative Factors that are found critical in the rating process are:

The scale of operations of a bank determines its capacity & ability to grow, while maintaining reasonable risk adjusted returns and sustenance of earnings with resilience. Hence, the strength of a bank in terms of scale of operations and market share with reference to competition are evaluated.

The Indian banking system consists of public sector banks, private sector banks, foreign banks, cooperative banks and regional rural banks. While comfort is drawn from the sovereign ownership of public sector banks, the credit view on other banks would depend on the ability of the bank to raise capital from promoters / other key shareholders, as and when required. Also viewed positively, is public sector bank with GOI shareholding well in excess of 51%, as it would have greater flexibility to raise capital by diluting GOI's shareholding.

Infomerics lays special emphasis on governance issues, quality of management, accounting quality, as these aspects form the foundation of a bank’s credit risk profile. The composition of the board, frequency of change of CEO/MD and the organisational structure of the bank are critically examined. The bank's strategic objectives and initiatives in the context of resources available, track record in managing stress situations is also evaluated. The extent of frauds committed in the bank is viewed as an indication of the inadequacy of the control system. The track record of labour relations is also looked into.

A well regulated and supervised system is the backbone for credibility and stability of banks even when the operating environment is unfavourable. The track record of the bank in complying with regulatory compliances like SLR/CRR and priority sector lending norms as specified by the RBI are examined.

The rating is based on the audited financial data submitted by the issuer. Consistent & fair accounting policies are a pre-requisite for financial evaluation. Further, the RBI has also issued prudential norms for Banks specifying the accounting methods to be used for income recognition, provisioning for bad and doubtful advances and valuation of investments. In evaluating Bank's accounting quality, the review is made with regard to the Bank's accounting policies, notes to the accounts, and auditors' comments in detail.

SIZE AND MARKET PRESENCE
OWNERSHIP STRUCTURE AND GOVERNMENT SUPPORT
MANAGEMENT QUALITY
RISK MANAGEMENT
COMPLIANCE WITH STATUTORY REQUIREMENTS
ACCOUNTING QUALITY

Capital Adequacy is a measure of the bank’s ability to meet its obligations relative to its exposure to risk and also relates to the degree to which the bank's capital is available to absorb possible losses. It also indicates the ability of the bank to undertake additional business. The evaluation by Infomerics factors the conformity of the bank to the regulatory guidelines on capital adequacy ratio.Higher proportion of Tier I (core capital) in the overall capital is viewed favorably.The expected growth in the asset base and ability of the bank to generate capital through profits or by accessing capital markets, is also evaluated.

Resource base of the bank is analysed to assess the cost & composition. Deposits constitute core funding source of a bank. Higher proportion of low cost deposits in total deposits is viewed as positive and also examined is retail-wholesale deposit mix. Deposit growth rates and their rollover rates are also analysed. Ability of the bank to raise additional resources at competitive rates is also looked at.

Asset quality plays an important role in indicating the future financial performance of a bank. Asset quality holds the potential to impact earnings (higher NPAs could dilute the yields and necessitate higher credit provisions) and capital (lower earnings could slow down the internal capital generation or in extreme situations [loss] could weaken the capital). The evaluation of asset quality begins with the examination of the bank's credit risk management framework. The overall asset quality is examined by evaluating the sector by sector loan and off-Balance Sheet exposures. The bank's experience of loan losses and write off/provisions are studied carefully. The percentage of assets classified into standard, sub-standard, doubtful or loss and the track record of recoveries of the bank are examined closely. The portfolio diversification and exposure to troubled industries/areas is evaluated to arrive at the level of weak assets. The extent of diversification is also an important indicator of a bank’s asset quality. In assessing diversification, the factors generally include loan mix, portfolio granularity, geographical diversification and borrower profile. To evaluate asset quality, Gross NPA, Net NPA and restructured assets/weak assets are examined. Restructured assets/weak assets in banks total exposure are closely examined to arrive at the potential NPAs of the bank.

Liquidity plays an important role in the stability of the bank. Lack of liquidity can lead to a bank’s failure, while strong liquidity can help even an otherwise weak institution to operate smoothly during difficult times. The internal and external sources of funds to meet the bank's requirements are examined. The degree of the banks reliance on volatile funds is also examined. The liquidity risk is evaluated by examining the assets liabilities maturity (ALM) profile, deposit renewal rates, proportion of liquid assets to total assets and the degree to which core assets (those which are relatively illiquid) are funded by core liabilities. The short term external funding sources in the form of refinance facilities from RBI and the inter-bank borrowing limits available along with CRR and SLR investments are important sources of reserve liquidity.

Infomerics also calculates the Liquidity Coverage Ratio (LCR) as defined under Basel III guidelines. According to RBI, the LCR for commercial banks is to be calculated as “Stock of High Quality Liquid Assets (HQLAs) divided by Total Net Cash Outflow during the next 30 calender days”. A separate section of Liquidity in the Press Release is made highlighting therein the LCR, as calculated above, asset-liability maturity profile and a synopsis of the short-term external funding support available to meet the near-term debt servicing obligations.

A bank's ability to generate adequate returns is important from the perspective of its shareholders as well as debt subscribers. The purpose of the evaluation here is to assess the level of future earnings and quality of earnings of the Bank concerned by analysing its interest spreads, non-interest income, operating expenses and credit costs. Business areas that contributes to the core earnings is evaluated for risks as well as for its earning prospects and growth rate. Profitable operations are essential for banks to operate as an ongoing concern. Yield on business assets and on investments are viewed in conjunction with cost of funds to arrive at the spreads earned by the bank. Net interest income (NII) and Net interest margin (NIM) are evaluated to arrive at the spread available to the Bank. Operating efficiency is also examined in terms of expense ratios. Quality of bank's earnings is also impacted by the level of interest rate and foreign exchange rate risks that the bank is exposed to. The overall profitability is reviewed in terms of Return on Total assets (ROTA) and Return on Net worth(RONW).

Apart from the factors mentioned above, specific features of the bonds are also taken into account for the purpose of rating as described below-

Loss Absorption Feature of Tier II bond under Basel III

Tier II Bonds under Basel III can be written off or converted into common equity upon declaration of point of non viability (PONV) by RBI.

The Quantitative Factors as enumerated below cover a detailed review of key financial performance parameters and stability.
CAPITAL ADEQUACY
FUNDING SOURCES
ASSET QUALITY
LIQUIDITY MANAGEMENT
EARNINGS PROFILE

Features of Additional Tier I (AT1) bond - perpetual debt instrument (PDI) under Basel III posing additional risk

However, payment of coupons on PDIs from the revenue reserves is subject to the issuing bank meeting minimum regulatory requirements for CET1, Tier 1 and Total Capital ratios at all times and subject to the requirements of capital buffer frameworks.

A Non-Viable Bank

As per the RBI guidelines a Non-Viable Bank is a bank which, owing to its financial and other difficulties, may no longer remain a going concern on its own in the opinion of the Reserve Bank unless appropriate measures are taken to revive its operations and thus, enable it to continue as a going concern. The difficulties faced by a bank should be such that these are likely to result in financial losses and raising the Common Equity Tier-1 capital of the bank should be considered as the most appropriate way to prevent the bank from turning non-viable. Such measures would include write-off / conversion of non-equity regulatory capital into common shares in combination with or without other measures as considered appropriate by the Reserve Bank

Given the additional risks of AT1 bonds, they are typically notched down from the rating of Tier II bonds.

CONCLUSION

Detailed inter-bank analysis is done to determine the relative strengths and weaknesses of the bank in its present operating environment and any impact on it, in future. The rating process ultimately determines the likelihood of the rated debt obligation being serviced in full and on time. All relevant quantitative and qualitative factors are considered together, as relative weakness in one area of the bank's performance may be more than adequately compensated for by strengths elsewhere. However, the importance assigned to the factors are different for short term ratings and long term ratings. The intention of long term ratings is to look over a business cycle and not adjust ratings frequently for what appear to be short term performance aberrations. The final rating decision is made by the Rating Committee after a thorough analysis of the bank's position over the term of the instrument with regard to business fundamentals.

Coupon discretion - The bank must have full discretion at all times to cancel distributions/payments.
Coupon payment - Coupons must be paid out of distributable items. In this context, coupon may be paid out of current year profits. However, if current year profits are not sufficient i.e. payment of coupon is likely to result in losses during the current year, the balance amount of coupon may be paid subject to availability of sufficient eligible reserves (i.e. revenue reserves which are not created for specific purposes by a bank and other reserves including statutory reserves) and / or credit balance in profit and loss account, if any.
Loss Absorption Features- These bonds can be written-off or converted into common equity in case of following events:
1.breach of Common equity Tier 1 capital of 6.125% (5.5% till March 31, 2019) while the bank remains a going concern

2.declaration of point of non-viability (PONV) by RBI

FINANCIAL & OPERATING RATIOS CONSIDERED

In order to evaluate the aforesaid quantitative factors, various financial & operating ratios are calculated to see how a particular bank is placed over a three years time horizon on a standalone basis, as also with reference to its peers:

GROWTH

Total Income
Total Interest Income
Profit Before Tax(PBT)
Profit After Tax (PAT)
Deposits
Advances
Total Assets

PROFITABILITY

Credit/Deposit Ratio (times)
Interest income /Average interest earning assets (%)
Interest exp/Averageinterest bearing liabilities (%)
Cost of deposits (%)
Net Interest margin (%)
Interest Spread (%)
Operating Expenses to Average Total Assets(%)
Cost to income ratio (%)
Interest coverage (times)
ROTA (%)
RONW (%)

GEARING

Overall debt equity (times)
Capital adequacy (%)
Tier I Capital Adequacy (%)

ASSET QUALITY

Gross Non-PerformingAssets (Gross NPA %)
Net NPAs (%)
Net NPAs/ Networth (%)
Provision Coverage

The trend of a bank’s performance may be measured in terms of its year-to-year growth majorly in respect of its revenue, profit and business level (which is defined by aggregate of its deposits & advances). Although these parameters are interlinked, they also have standalone bearing on bank’s performance. Nowadays, the non-interest income also plays a dominant role, besides the traditional lending function, and hence, they impact the overall revenue of the bank. Therefore, there is a need to assess the growth pattern of income and total assets.

The ultimate success of a bank, its cash flow, long-term sustainability and ability to absorb shocks in case of adversities depends upon its ability to generate profit. As perennially and even now, the major activities of bank centre around raising money from public and deployment of the same by way of advances. Credit/Deposit ratio stands for deployment of deposits in the form of advances.It is important to ascertain the overall borrowing cost and the overall earning percentage, the difference of which indicate the Interest Spread.In ascertaining the overall borrowing cost, the cost of deposit as well as the profile of deposit of a particular bank also assume significance as deposits are the main source of funds to a bank. But in order to evaluate the net interest earning on assets which are deriving such income, Net Interest Margin is perceived to be more candid indicator. Various other parameters are also calculated to ascertain the overall return with reference to total assets. RONW indicates the net earning ability of a bank on best use of its networth. If the company is highly leveraged, then the PAT will be lower due to higher interest expenses. Interest coverage implies the interest servicing ability of a bank.

As for ascertaining the capital structure and the leverage of a bank, more than the traditional gearing ratios, the Capital Adequacy is looked at to measure the adequacy of capital vis-a-vis its risk weighted assets. Banks being the financial outfits with funds are main input, they are expected to have higher gearing ratios as compared to manufacturing companies. Higher proportion of Tier I (core capital) in the overall capital is also carefully viewed.

The asset quality of a bank is the major broad parameter indicating the performance of a bank, these are measured in terms of proportion of Gross NPAs to Gross advances and Net NPAs to Net Advances. While Gross NPA ratio indicates the true asset quality of a bank, the Net NPA ratio is calculated after factoring the provision made for NPAs. However, the Net NPAs to Networthsignifies the ability of the company to absorb the impact of NPAs, while Provision Coverage indicates the extent of provisions made in respect of Gross NPAs.

ARCHIVE

The rating methodologies developed by Infomerics for evaluation of banks comprise of qualitative and quantitative factors, the details of which are described below.

The Qualitative Factors that are found critical in the rating process are:

A) OPERATING ENVIRONMENT

The assessment of a bank’s operating environment is one of the most important parameters for the credit risk evaluation of a bank, as it could affect growth, asset quality and its earnings. The operating environment of a bank is studied through an analysis of the prevailing economic conditions, growth prospects (GDP growth rate), the likely deposits and credit growth, structural constraints in the economy (such as a large fiscal deficit and the necessity of banks to invest in Statutory Liquidity Ratio [SLR] instruments) as well as the impact of economic and regulatory environment on the credit risk profile. Infomerics also evaluates the likely policy changes to combat these challenges. Additionally, political risks and the legal system of the country are also evaluated to assess the asset quality of banks as well as their ability to recover from delinquent accounts. An evaluation of the structure of the financial market, stages of development and intensity of competition forms an important part of the evaluation of a bank’s operating environment.

B) OWNERSHIP STRUCTURE AND GOVERNMENT SUPPORT

The Indian banking system consists of public sector banks, private sector banks, foreign banks, cooperative banks and regional rural banks. While comfort is drawn from the sovereign ownership of public sector banks, the credit view on some of the private sector banks would depend on the ability of the bank to raise capital from promoters / other key shareholders, as and when required. Also viewed positively is public sector bank with GOI shareholding well in excess of 51%, as it would have greater flexibility to raise capital by diluting GOI?s shareholding.

C) MANAGEMENT QUALITY

Infomerics lays special emphasis on governance issues, quality of management, systems & policies, shareholder expectations, the strategy followed to manage these expectations and accounting quality, as these aspects form the foundation of a bank’s credit risk profile. The composition of the board, frequency of change of CEO/MD and the organisational structure of the bank are critically examined. The bank's strategic objectives and initiatives in the context of resources available, its ability to identify opportunities and track record in managing stress situations are taken as positives. In addition, evaluation is done on the quality, depth, timeliness and relevance of information available to the banks management. The analysis of system adequacy encompasses the quality of the communications network, level of computerisation & integration within the bank, systems for accounting control, management information for monitoring performance, business development and statutory reporting. The extent of frauds committed in the bank is viewed as an indication of the inadequacy of the control system. The evaluation focuses on the adoption of modern banking practices and systems, capabilities of senior management, personnel policies and extent of delegation of powers. The track record of labour relation is also examined.

D) RISK MANAGEMENT

A careful evaluation of the risk management policies of the bank is conducted, as it provides an important guidance for the future liquidity, profitability, asset quality and capitalisation of the bank concerned. The risk management of the bank is evaluated for credit risk, market risk, operational risk, foreign currency risk and interest rate risk. Credit risk management is evaluated by examining the quality of appraisal, monitoring & recovery systems and the prudential lending norms of the bank. The bank's balance sheet is examined from the perspective of interest rate sensitivity and foreign exchange rate risk. Interest rate risk arises due to varied maturity of assets and liabilities and mismatch between the floating and fixed rate assets and liabilities. Also being examined is the extent to which the bank has assets denominated in one currency with liabilities denominated in another currency. The analysis is also done on the derivatives and other risk management products used in the past and implication of these deals are also examined. The evaluation of a bank’s risk management focusses on its ability to assess, control, mitigate and disclose the aforesaid risks. This is done by evaluation of norms &^ tolerance limits, roles & responsibilities, relative importance and independence of risk function as compared to operating lines and systems to implement the risk management framework.

E) COMPLIANCE WITH STATUTORY REQUIREMENTS

F) ACCOUNTING QUALITY

The rating is based on the audited financial data submitted by the issuer. Consistent & fair accounting policies are a pre-requisite for financial evaluation and peer group comparisons. Further, the RBI has also issued prudential norms for Banks specifying the accounting methods to be used for income recognition, provisioning for bad and doubtful advances, and valuation of investments. In evaluating Bank’s accounting quality, the review is made with regard to the Bank’s accounting policies, notes to the accounts, and auditors’ comments in detail. Deviations from the Generally Accepted Accounting Practices are noted and the financial statements of the Bank are adjusted to reflect the impact of such deviations.

G) SIZE AND MARKET PRESENCE

The scale of branch network of a bank determines its capacity & ability to grow, while maintaining reasonable risk adjusted returns and sustenance of earnings with resilience. Hence, the strength of a bank in terms of scale of operations vis-à-vis branch networking and market share for various activities at the pan-India level alongwith business niche, positioning with reference to competition are evaluated. Brand recognition, complexity of key areas of work and special government support or privileges as compared to other banks are also captured.

QUANTITATIVE FACTORS

as enumerated below cover a detailed review of key financial performance parameters and stability.

A) ASSET QUALITY

Asset quality holds the potential to impact earnings (higher NPAs could dilute the yields and necessitate higher credit provisions) and capital (lower earnings could slow down the internal capital generation or in extreme situations [loss] could weaken the capital). The evaluation of asset quality begins with the examination of the bank’s credit risk management framework. The quality of credit administration as reflected in design and implementation of appraisal and loan pricing methodologies and adherence to periodic review are examined. The overall asset quality is examined by evaluating the sector by sector loan and off-Balance Sheet exposures. The bank's experience of loan losses and write off/provisions are studied carefully. The percentage of assets classified into standard, sub-standard, doubtful or loss and the track record of recoveries of the bank are examined closely. The portfolio diversification and exposure to troubled industries/areas is evaluated to arrive at the level of weak assets. The extent of diversification is also an important indicator of a bank’s asset quality. In assessing diversification, the common factors include loan mix, portfolio granularity, geographical diversification and borrower profile. Restructured assets in banks total exposure are closely examined to arrive at the potential NPAs of the bank. Also evaluated the risk of devolvement of obligations on a bank from its underperforming subsidiaries, if any. The devolvement may arise legally or due to the publicly perceived moral obligation of a parent to support a subsidiary organisation.

B) FUNDING SOURCES

Resource base of the bank is analysed to assess the cost & composition. Deposits constitute core funding source of a bank. Higher proportion of low cost deposits in total deposits is viewed as positive and also examined is retail-wholesale deposit mix. Deposit growth rates and their rollover rates are also analysed. Average as well as incremental cost of funds is examined in the context of prevailing interest rate regime. Ability of the bank to raise additional resources at competitive rates is examined critically.

C) LIQUIDITY MANAGEMENT

Liquidity plays an important role in the stability of the bank. Lack of liquidity can lead to a bank’s failure, while strong liquidity can help even an otherwise weak institution to remain adequately funded during difficult times. The internal and external sources of funds to meet the bank's requirements are examined. The degree of the bank?s reliance on volatile funds in relation to total assets is examined. Some short-term funding sources are more sensitive than others to adverse developments. Infomerics views inter-bank funding by domestic banks and domestic deposits by non-bank depositors in descending order of confidence The liquidity risk is evaluated by examining the assets liabilities maturity (ALM) profile, deposit renewal rates, proportion of liquid assets to total assets and the degree to which core assets (those which are relatively illiquid) are funded by core liabilities. The short term external funding sources in the form of refinance facilities from RBI and the inter-bank borrowing limits available along with CRR and SLR investments are important sources of reserve liquidity.

D) EARNINGS PROFILE

A bank’s ability to generate adequate returns is important from the perspective of its shareholders as well as debt subscribers. The purpose of the evaluation here is to assess the level of future earnings and quality of earnings of the Bank concerned by analysing its interest spreads, fee income, operating expenses and credit costs. The income composition of the bank is examined by segregating it into those generated from fee based and fund based activities. A large fee income allows greater diversification, which, in turn, can improve a bank’s resilience of earnings and earning profile. The trading income of the bank is also evaluated to assess the sustained level of income / losses under an adverse interest rate scenario. Core earnings are also identified by excluding non-recurring income from total income. Each business area that contributes to the core earnings is evaluated for risks as well as for its earning prospects and growth rate. Profitable operations are essential for banks to operate as an ongoing concern. Yield on business assets and on investments are viewed in conjunction with cost of funds to arrive at the spreads earned by the bank. Net interest income (NII) and Net interest margin (NIM) are evaluated to arrive at the spread available to the Bank. Operating efficiency is also examined in terms of expense ratios. Quality of bank's earnings is also impacted by the level of interest rate and foreign exchange rate risks that the bank is exposed to. The overall profitability is reviewed in terms of return on assets (ROA), return on net worth and return on equity (ROE).

E) CAPITAL ADEQUACY

Capital provides the second level of protection to debt holders (earning being the first) and, therefore, its quality and adequacy (in relation to the embedded credit, market and operational risk) is an important consideration for ratings. Capital Adequacy is a measure of the bank’s ability to meet its obligations relative to its exposure to risk and also relates to the degree to which the bank's capital is available to absorb possible losses. It also indicates the ability of the bank to undertake additional business. The evaluation by Infomerics factors the conformity of the bank to the regulatory guidelines on capital adequacy ratio. Higher proportion of Tier I (core capital) in the overall capital is viewed favourably. During the rating process, the expected erosion of capital and its impact on the capital adequacy is examined factoring additional provisioning for NPAs, possible losses from restructured assets and possible losses from other weak assets.

F) PEER GROUP ANALYSIS

Infomerics carries out peer group comparison on each of the above discussed parameters with the bank’s performance. Detailed inter-bank analysis is done to determine the relative strengths and weaknesses of the bank in its present operating environment and any impact on it, in future. All relevant quantitative and qualitative factors are considered together, as relative weakness in one area of the bank's performance may be more than adequately compensated for by strengths elsewhere. However, the weights assigned to the factors are different for short term ratings and long term ratings. The intention of long term ratings is to look over a business cycle and not adjust ratings frequently for what appear to be short term performance aberrations. The quality of the management and the competitiveness of the bank are of greater importance in long term rating decisions.

CONCLUSION

The rating process ultimately determines the likelihood of the rated debt obligation being serviced in full and on time. The assessment of management quality, the bank's operating environment and its role in the nation's financial system are used to interpret current data and to forecast how well the bank is likely to be positioned in the future. While several parameters are used to assess the risk profile of a Bank, the relative importance of each of these qualitative and quantitative parameters can vary across banks, depending on its potential to change the overall risk profile of the bank concerned. The final rating decision is made by the Rating Committee after a thorough analysis of the bank's position over the term of the instrument with regard to business fundamentals.

FINANCIAL & OPERATING RATIOS CONSIDERED

GROWTH

(i) Total Income

(ii) Total Interest Income

(iii) Treasury Income

(iv) Profit After Tax (PAT)

(v) Deposits

(vi) Advances

(vii) Total Assets

PROFITABILITY

(i) Operating Margin (%)

(ii) PAT Margin (%)

(iii) Return on Investment (RoI)

(iv) Interest Spread (%)

(v) Net Interest margin (%)

(vi) Net Spread (%)

(vii) Return on Total Assets (ROTA - %) - before provisions

(viii) ROTA (%)

(ix) Return on Net Worth (RONW - %)

(x) Treasury Profit/Profit Before Tax (PBT)

(xi) Interest income /Average interest earning assets (%)

(xii) Interest exp/Average interest bearing liabilities (%)

(xiii) Operating Expenses/Average Total Assets (%)

(xiv) Interest coverage - before provisions (times)

(xv) Interest coverage - after provisions (times)

(xvi) Cost of deposits (%)

GEARING

(i) Total Debt / Networth (times)

(ii) Capital adequacy (%)

ASSET QUALITY

(i) Gross Net Performing Assets (NPAs - %)

(ii) Net NPAs (%)

(iii) Net NPAs/ Networth (%)

(iv) Provision Coverage/br> (v) Credit Deposit Ratio

The trend of a bank’s performance may be measured in terms of its year-to-year growth majorly in respect of its revenue, profit volume and business level (which is defined by aggregate of its deposits & advances). Although these parameters are interlinked, they have also standalone bearing on bank’s performance. Nowadays, the investment/treasury activities also play a dominant role, besides the traditional lending function, and hence, they impact the overall asset level and the revenue of a bank. Therefore, there is a need to assess the growth pattern of treasury income and total assets.

The ultimate success of a bank, its cash flow, long-term sustainability and ability to absorb shocks in case of adversities depends upon its ability to generate profit. Although the usual profitability parameters like Operating Profit Margin and PAT Margin throw significant light towards that, much more meaningful evaluation is possible if various derivative based ratios are looked at. As perennially and even now, the major activities of bank centre around raising money from public and deployment of the same by way of advances, it is important to ascertain the overall borrowing cost and the overall earning percentage, the difference of which indicate the Interest Spread. In ascertaining the overall borrowing cost, the cost of deposit as well as the profile of deposit of a particular bank also assume significance as deposits are the main source of funds to a bank. But in order to evaluate the net interest earning on assets which are deriving such income, Net Interest Margin is perceived to be more candid indicator. While these two items like overall borrowing cost and the overall earning are, to a great extent, the outcomes of market forces, the bank is left with the option to contain the overhead to improve overall bottomline which is represented by Net Spread. Various other parameters are also calculated to ascertain the overall return with reference to total assets and capital employed. As the provision made for non-performing assets is more on account of legacy and generally not the result of the particular year’s lending policy and/or decisions, so the ROTA is assessed both before provisions and after provisions. RONW indicates the net earning ability of a bank on best use of its networth. If the company is highly leveraged, then the PAT will be lower due to higher interest expenses. Interest coverage implies the interest servicing ability of a bank.

As for ascertaining the capital structure and the leverage of a bank, more than the traditional gearing ratios the Capital Adequacy is looked at to measure the adequacy of capital vis-a-vis its risk weighted assets. The minimum Capital Adequacy ratio is stipulated by the central bank based on its empirical analysis considering the domestic economy and the global best practices. Banks being the financial outfits with funds are main input, they are expected to have higher gearing ratios as compared to manufacturing companies.

The asset quality of a bank is the major broad parameter indicating the performance of a bank, These are measured in terms of proportion of gross NPAs to gross advances and net NPAs to net advances. While gross NPA percentage indicates the real asset quality of a bank, the net NPA percentage is calculated after factoring the provision made for NPAs. However, the Net NPAs to Networth signifies the ability of the company to absorb the impact of NPAs, while Provision Coverage indicates the extent of provisions made in respect of Gross NPAs. The credit-deposit ratio stands for deployment of deposits in the form of advances.