A small finance bank’s Net Stable Funding Ratio denotes its resilience in the long term. Banks must have a minimum NFSR of 100 percent, as per the RBI.
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Small finance banks (SFBs) have been offering attractive returns on term deposits ever since the Reserve Bank of India hiked the repo rate multiple times from May last year. But SFBs are known to be riskier than other commercial banks. If you are interested in opening an account in a small finance bank, you need to do a detailed assessment of the SFB before depositing your money.
Here are some ways you can check if your small finance bank is safe.
DIGCI cover: Check if the SFB comes under the Deposit Insurance and Credit Guarantee Corporation (DICGC)’s insurance cover of Rs 5 lakh. This insurance includes both the principal amount and interest. Ensure that the small finance bank’s fixed deposits offer the DIGCI insurance cover.
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Evaluate the bank’s financials: Most small finance banks disclose their financials on their website. You can take a look at various factors such as the SFB’s current account savings account (CASA) ratio, Net Stable Funding Ratio (NSFR), Liquidity Coverage Ratio (LCR) and Capital Adequacy Ratio (CAR).
CASA ratio is the portion of current and savings account deposits in the total deposits of a bank. A higher CASA ratio means that the bank has higher profitability and can raise funds cheaply.
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LCR means that the bank has the ability to withstand short-term liquidity shocks. LCR take the high-quality liquid assets (HQLAs) of a financial institution into account. A higher LCR means that the bank is more resilient to economic shocks. As per the RBI, SFBs must have a LCR of 100 percent.
A small finance bank’s Net Stable Funding Ratio denotes its resilience in the long term. Banks must have a minimum NFSR of 100 percent, as per the RBI.
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CAR, also known as Capital to Risk (weighted) Adequacy Ratio (CRAR), is also an important factor to consider. It is the proportion of a bank’s capital to its risk-weighted assets and present liabilities. A higher CRAR means that the bank is safer.
Diversified lending: Check if the SFB has given huge loans to a particular sector or corporation. This might put it at more risk of failure. A diversified lending portfolio will enable the bank to reduce this risk.
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Provision Coverage Ratio (PCR): This shows the amount of provisions made by a bank for its non-performing assets. A high PCR means that the bank is well-equipped to deal with its NPAs. The RBI has mandated that the PCR should at least be 70 percent for all banks.
Timely declaration of financial data: If the SFB declares its financial data at regular intervals, it means that the bank is more transparent. If the quarterly data of the SFB is not shared timely, it can mean that all is not good with the bank.
