Question

Discuss the various ways of measuring a bank's ability to sustain a loss. Advantages/disadvantages?

Answer 1

Banks Ability is measured using the Capital and Reserves that are to maintained by it.

In case of Banking Regulation Act in India

1.In case of Banking Company incorporated outside India and having place of business in Bombay or Calcutta or both ,the aggregate valure of Paid up capital shall not be less than Rs.20 lakhs(Similar regulations for others)

2.Reserve fund to be maintaoined and need to transfer to reserves atleast 25% of its profits.

3.There are certain restrictions to Payment of Dividend

4.Cash Reserves to be maintained in the Bank as per the Direction of RBI

5.For providing the license to Banks there shall be initial paid up captal shall be atleast 200 crores and within 3 years it is to be increased to 300 crores

6. Needs to maintain and follow Cash ,Gold and security norms

The main notes is the measure of banks ability is by Capital for that certain ratios needed to be mentioned

1.Capital Adequacy ratio

2.Tier-1 Capital

3.Tier II Capital

4.Gross Value of Investments in Domestic and Foreign ,the aggregate of Provisions for depreciation seperately for each

5.Percentage of Net NPA to net advances

6.Operating profit as as percentage to Working Funds

7.Return on Assets

8.Business (Deposits+Advances) per employee

9.Movement of NPA etc..

Advantages

1.To stop reckless lending by banks

2.To Strengthen the soundness and stability of the banking system

3.To have a comparitive footing of the banks of different countries

Disadvantages

1.Not regulated under regular provisions and donot have proper freedom to conduct operations

2.need to be compulsorily maintain the required funds irrespective of the business conditions