A higher ratio indicates the better income generating capacity of the assets and better efficiency of management. It is arrived at by dividing the net profit by average assets, which is the average of total assets in the current year and previous year.
Thus, this ratio measures the return on assets employed. Higher ratio indicates better earning potential in the future. Interest Income to Total Income: Interest income is a basic source of revenue for banks. The interest income total income indicates the ability of the bank in generating income from its lending. Interest income includes income on advances, interest on deposits with the RBI, and dividend income.
The bank generates higher fee income through innovative products and adapting the technology for sustained service levels. The higher ratio indicates increasing proportion of fee- based income. The ratio is also influenced by gains on government securities, which fluctuates depending on interest rate movement in the economy.
It is, therefore, generally assessed in terms of overall assets and liability management, as mismatching gives rise to liquidity risk. Efficient fund management refers to a situation where a spread between rate sensitive assets RSA and rate sensitive liabilities RSL is maintained. The most commonly used tool to evaluate interest rate exposure is the Gap between RSA and RSL, while liquidity is gauged by liquid to total asset ratio.
Initially solvent financial institutions may be driven toward closure by poor management of short-term liquidity. Indicators should cover funding sources and capture large maturity mismatches. The term liquidity is used in various ways, all relating to availability of, access to, or convertibility into cash. An institution is said to have liquidity if it can easily meet its needs for cash either because it has cash on hand or can otherwise raise or borrow cash.
A market is said to be liquid if the instruments it trades can easily be bought or sold in quantity with little impact on market prices. An asset is said to be liquid if the market for that asset is liquid.
The common theme in all three contexts is cash. A corporation is liquid if it has ready access to cash. A market is liquid if participants can easily convert positions into cash— or conversely. An asset is liquid if it can easily be converted to cash. Liquidity Asset to Total Asset: Liquidity for a bank means the ability to meet its financial obligations as they come due.
Bank lending finances investments in relatively illiquid assets, but it fund its loans with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions.
Liquid assets include cash in hand, balance with the RBI, balance with other banks both in India and abroad , and money at call and short notice. Total asset include the revaluations of all the assets. The proportion of liquid asset to total asset indicates the overall liquidity position of the bank.
Government Securities to Total Asset: Government Securities are the most liquid and safe investments. This ratio measures the government securities as a proportion of total assets. This ratio measures the risk involved in the assets hand by a bank. Approved Securities to Total Asset: Approved securities include securities other than government securities. This ratio measures the Approved Securities as a proportion of Total Assets.
Liquidity Asset to Demand Deposit: This ratio measures the ability of a bank to meet the demand from deposits in a particular year. Demand deposits offer high liquidity to the depositor and hence banks have to invest these assets in a highly liquid form. Liquidity Asset to Total Deposit: This ratio measures the liquidity available to the deposits of a bank. Total deposits include demand deposits, savings deposits, term deposits and deposits of other financial institutions.
Liquid assets include cash in hand, balance with the RBI, and balance with other banks both in India and abroad , and money at call and short notice.
Market Risk encompasses exposures associated with changes in interest rates, foreign exchange rates, commodity prices, equity prices, etc. While all of these items are important, the primary risk in most banks is interest rate risk IRR , which will be the focus of this module.
The diversified nature of bank operations makes them vulnerable to various kinds of financial risks. Banks are increasingly involved in diversified operations, all of which are subject to market risk, particularly in the setting of interest rates and the carrying out of foreign exchange transactions.
In countries that allow banks to make trades in stock markets or commodity exchanges, there is also a need to monitor indicators of equity and commodity price risk. Interest Rate Risk Basics: In the most simplistic terms, interest rate risk is a balancing act.
Banks are trying to balance the quantity of reprising assets with the quantity of repricing liabilities. For example, when a bank has more liabilities re-pricing in a rising rate environment than assets reprising, the net interest margin NIM shrinks.
Conversely, if your bank is asset sensitive in a rising interest rate environment, your NIM will improve because you have more assets reprising at higher rates. Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes counterparties to avoid trading with or lending to the institution.
A firm is also exposed to liquidity risk if markets on which it depends are subject to loss of liquidity. If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows with two different counterparties on a given day.
If the counterparty that owes it a payment defaults, the firm will have to raise cash from other sources to make its payment. Should it be unable to do so, it too we default. Here, liquidity risk is compounding credit risk.
Accordingly, liquidity risk has to be managed in addition to market, credit and other risks. Because of its tendency to compound other risks, it is difficult or impossible to isolate liquidity risk. In all but the most simple of circumstances, comprehensive metrics of liquidity risk don't exist. Certain techniques of asset-liability management can be applied to assessing liquidity risk. If an organization's cash flows are largely contingent, liquidity risk may be assessed using some form of scenario analysis.
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SBI Scored the lowest position with least ratio of 0. Net profit to Total assets: This ratio reflects the return on assets employed or the efficiency in utilization of assets. It is calculated by dividing the net profits with total assets of the bank. Higher the ratio reflects better earning potential of a bank in the future. It is calculated by Interpretation: dividing the net profits with total assets of the bank. BOB scored the lowest position with least ratio of 0.
Return on Assets ROA : Returns on asset ratio is the net income profits generated by the bank on its total assets including fixed assets.
The higher the proportion of average earnings assets, the better would be the resulting returns on total assets. Similarly, ROE returns on equity indicates returns earned by the bank on its total net worth. Net Interest Margin The net interest margin measures the difference between interest paid and interest received, adjusted relative to the amount of interest-generating assets.
A positive net interest margin means the investment strategy pays more interest than it costs. Conversely, if net interest margin is negative, it means the investment strategy costs more than it makes. Table: 15 Sr. A higher spread indicates the better earnings given the total assets. HDFC is on the top position with highest average of 3. BOB scored the last position with least ratio of 1. Composite Rating Of Earnings Table : 16 1.
Credit Deposit Ratio Credit Deposit Ratio is the ratio of how much a bank lends out of the deposits it has mobilized. RBI does not stipulate a minimum or maximum level for the ratio, but a very low ratio indicates banks are not making full use of their resources.
Alternatively, a high ratio indicates more reliance on deposits for lending and a likely pressure on resources. If the ratio is too low, banks may not be earnings as much as they could be. If the ratio is too high, it means that banks might not have enough liquidity to cover any unforeseen fund requirements, may effect capital adequacy and asset-liability mis-match.
A very high ratio could have implications at the systemic level. Liquidity or short term solvency means ability of the business to pay its short term liabilities. It is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash.
If the value is greater than 1. The process of our study highlighted that, the different banks have obtained different ranks with respect to CAMELS ratios. Our study concluded that in terms of capital adequacy ratio parameter ICICI was at the top position The possible reason for this was the strong performance in debt-equity, advances to assets. In terms of asset quality parameter, SBI held the top rank, the possible reason for this was the strong performance of SBI in gross NPA to net advances, net NPAs to net advances, and total loans to total assets ratios.
The possible reason for this was the poor performance of ICICI in total advances to total deposits, profit per employee and business per employee ratios. The possible reason for this was the poor performance of HDFC in net profit to total assets, return on assets and net interest margin to total assets ratios.
The present study is limited in scope as it relates to four banks only. Recommendations On the basis of the findings of the study, it recommends that: i The banks should improve their capital base and maintain adequate capital adequacy ratio, lower the ratio more the performance of the banks. The administration of the bank should make sure the costs of the bank are utilized in the sensible way. For asset quality banks need to enhance their procedures for screening, credit clients and observing of credit danger.
This is a critical indicator on the grounds that the banks have confronted difficult issues with non- performing credits in the past which prompted the breakdown of numerous banks. Then again banks ought to concentrate on enhancing their capital levels so as to enhance their financial execution. This will empower the banks to be cushioned against outside stuns, as well as to exploit business open incredibly and expand their budgetary execution in the process.
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