Page 34 - Banking Finance March 2019

ARTICLE

of existing and prospective customers to increase business The outcome of this ratio reflects the ability of the bank to
and income levels. make optimal use of the available resources. Ratio of Vijaya
Bank is high when compared to the other TWO banks.
(v) ROA (Return on Assets) (%) : (Net Profit /
Total Assets) * 100 Banks have to tap the lending opportunity available in the
market which gives more margins to the bank in future. To
Name of the Bank 2018 Rank increase this ratio, Banks are to be introduced more
Bank of Baroda -0.34 2 Innovative digital products both in deposit and advance
Vijaya Bank 0.41 1 segments.
Dena Bank -1.59 3 (vii) Net Interest Margin (NIM) (%) : (Net
Interest Income ^ / Total Assets) * 100
ANALYSIS:
Name of the Bank 2018 Rank
Returns on asset ratio is the net income (profits) generated
by the bank on its total assets (including fixed assets). The Bank of Baroda 2.16 2
higher the proportion of average earnings assets, the better Vijaya Bank 2.42 1
would be the resulting returns on total assets and to assess Dena Bank 2.05 3
the profitability of the bank based on the assets.
^Net Interest Income = Interest Income - Interest Expenses
ROA of Vijaya Bank is in No: 1 position among three, as Bank
of Baroda and Dena Bank the net result is negative (loss) ANALYSIS:
hence these TWO Banks ROA is in negative. But still Vijay The difference between interest income and interest
Bank ROA is considered as very low and indicates that banks expense is known as net interest income. It is the income,
deployment of the funds is not upto the mark.
which the bank earns from its core business of lending. As
Factors contribute to increase in ROA of the banks are such, NIM is the net interest income earned by the bank on
mobilization of Low Cost Deposits, High Yield Interest Rate its assets. These assets comprises of advances, investments,
on Advances, low NPAs, No income leakages, increase in balance with the RBI and Money-at-Call Notice etc. Hence
non-interest income business etc. The minimum percentage it is calculated as,
ROA in Banking Industry should be 1%.
NIM = (Interest income - Interest expenses) / Total Assets
(vi) Credit Deposit Ratio (%) : (Credit / Deposits)
The difference between the revenue generated by interest
* 100 bearing assets and cost of borrowed fund gives the Net
Name of the Bank 2018 Rank Interest Income (NII) of the bank. The NII when expressed
as a percentage of the assets gives the NIM of the bank.
Bank of Baroda 72.28 2
Vijaya Bank 73.86 1
NIM of Vijaya Bank is more and Bank of Baroda and Dena
Dena Bank 61.79 3 Banks is less. To increase in the NIM Ratio, Bank should give
more focus on CASA deposits, where the cost of deposits is
ANALYSIS: low when compared to Time Deposits. The other strategy

This ratio indicates how much of the advances lent by banks to increase in Net Interest Margin is to sanction High Yield
is done through deposits. It is the proportion of loan-assets Interes Rates Advances.
created by banks from the deposits received.
Once the loan account turns into NPA, accrued Interest on
The higher the ratio, the higher the loan-assets created NPAs should not be taken as Interest Income. Hence, banks
from deposits and also it increases the profits / bottom-line should minimize the Non-performing Assets and it should be
of the bank through positive spreads. Deposits would be in within 3% of Total Advances. If NPAs are on increasing
the form of current and saving account as well as term trend, "Recycling of Funds" will stop, thereby it decreases
deposits. the Interest Income to the Bank.

34 | 2019 | MARCH | BANKING FINANCE