Prime Bank FD Tool

This tool shows key data on the financial health of banks to help you make an informed choice on which bank to hold your fixed deposits. This information gives you an understanding of a bank’s size, the health of its loan book, and its risks. To make it even easier for you, we have given PrimeInvestor’s confidence level for each bank, based both on the data displayed as well as other quantitative and qualitative analysis.

The data is only for listed banks and small finance banks listed on the stock exchanges. Data is based on latest available disclosures, which is a mix of quarterly and annual disclosures.

How to use Prime Bank FD Tool

The Prime Bank FD Tool will help you identify the pros and risks in a bank. This tool works for you in the following ways:

1. It tells you which banks are safe enough for you to hold fixed deposits. They are not based on prevailing interest rates. That is a call you can take.
2. It tells you which are the higher-risk banks. This helps you decide what proportion of your investment to hold in these banks or which goals to use them for.
3. Comparing the risks against the interest rate the bank offers will tell you if the interest offered is adequate in light of the risk.
4. It will bring to your notice any growing risks in a bank, allowing you to decide whether or not you should renew or reduce your deposits.

What Prime Confidence tells you

To arrive at the Prime Confidence for each bank, the metrics listed in the tool above are considered along with other metrics such as growth in deposit base and bad loan provisioning. In addition, qualitative factors such as possible risk of rise in NPAs, capital cushion and ability to raise capital, nature of loan book exposure and so on are considered.

• High Confidence: These are banks that score on all metrics. They have sizeable, growing deposits, have NPAs under control, and are healthy on capital. You can hold FDs from these banks for any timeframe, towards any goal, and for any amount (but do diversify across few banks). The FD portion of your emergency portfolio must necessarily be in these bank FDs.
• Medium Confidence: These are banks that could be fast growing, or which are large but have some detractions in the form of existing or potential NPAs or other risks. Interest rates on these bank FDs, though, are often attractive which make them good options for those looking for better rates. Should you choose these bank FDs, ensure that the rates you’re getting are genuinely better than those of the ‘High Confidence’ banks. Cap the maximum you hold in each bank at Rs 5 lakh in order to benefit from deposit insurance and spread your risk out. If you already hold these bank FDs, stay invested but avoid stepping up investments beyond the Rs 5 lakh limit. Avoid parking emergency money in these FDs.
• Low Confidence: These are banks that are either high on NPAs, or which don’t have enough capital to absorb risks or may find it hard to do so. These banks should not be your first choice to hold FDs, nor should you hold FDs meant for emergency portfolios. As far as possible, avoid investing afresh in these bank FDs. If you already hold FDs here, stay invested but bring exposure below the Rs 5 lakh limit as early as you can.

Explaining the metrics

#1 Deposit size

When it comes to financial firms, there’s safety in size. The larger a bank’s existing deposit base, the more likely it is that it’s a trusted name with depositors. The government and regulators are also loath to let a bank with a large deposit base run into hot waters lest it trigger a run on the rest of the financial system.

#2 Capital adequacy

One key reason why banks so easily turn turtle is that they lend out sums that are many times their long-term capital. Capital adequacy is measured as the proportion of the bank’s own capital (leaving out deposits and other borrowed money) to the loans it gives out (which are assets on its balance sheet).

To discourage banks from giving out too many loans risky borrowers, regulators specify ‘risk weights’ for each category of loans. The CRAR or Capital to Risk-Weighted Assets ratio is the official ratio used to measure a bank’s capital adequacy. It is the ratio of the bank’s own and supplementary capital to its risk-weighted loans.

As per RBI rules, all Indian banks are required to maintain a minimum CRAR Ratio of 10.875% (including a capital buffer), while ‘systemically’ important ones are required to maintain 11.075%. The higher a bank’s CRAR is above the minimum regulatory limits, the more cushion it has to keep lending and to absorb losses from bad loans and provisions.

#3 GNPA and NNPA Ratio

One thing that can quickly trip up a bank’s cash flows is delays or defaults in loan repayments by borrowers. This is captured in the Gross Non-performing Asset (GNPA) ratio.

Banks are required to treat any loans on which interest or principal repayments are overdue for over 90 days as non-performing assets or NPAs. When a loan turns NPA, RBI requires the bank to make specific loan-loss provisions against the NPA.

A bank’s Gross NPA ratio is the proportion of its total NPAs to its total loans/advances. The net NPA ratio is the proportion of loans, not covered by loss provisions, as a proportion of its total advances. While GNPA comparisons are best done against the backdrop of economic conditions and peers, as a thumb rule, GNPA ratios of 5% or more are deemed high.

The net NPA tells you how much of the bank’s bad loans have already been accounted for in its past profits. The wider the gap between the net NPA ratio and the gross NPA, the better it is for the bank’s future profitability, as it indicates that the bank has already provided for a bulk of its existing bad loans.

#4 Systemically important

In the interests of shoring up public confidence in the banking system, the RBI designates giant domestic banks as ‘systemically important’ and keeps an extra-careful watch over them, by specifying higher capital adequacy and other norms. If you are looking for an ultra-safe parking ground for a windfall or a large lump-sum, stick to systemically important banks as these are the least likely to be allowed to get into financial trouble.

#5 Whether under PCA

If RBI believes that a bank is at risk of breaching its capital adequacy requirements or is heading to an unsustainable bad loan situation, it can place it under its “Prompt Corrective Action” framework. Once a bank is under PCA, it can be restricted from lending to select or all sectors, accepting deposits and pursuing its business in other ways to conserve capital. RBI can also step in to replace the bank’s Board or management and merge it with another bank. Being placed under PCA is seldom good for bank’s depositors as it can limit growth until fresh capital is infused.

Other useful links to use:

1. Fund-wise rolling return metrics
2. MF Review tool
3. Best Mutual funds
4. Prime MF Ratings
5. Other useful articles on MF basics

General Disclosures and Disclaimers