Bank

Evalua*on
Dr Ayesha Afzal
Assistant Professor

a) Total Assets [log(TAit)]

b) Network Size [it]
c) Return on Assets [ROAit]
Return on Assets (ROA) explains the overall
protability of a bank emana*ng from the asset
porBolio (both advances and investments).

d) Overheads to Total Assets [(OHit/TAit)]

Overhead costs include salaries and other
administra*ve expense including wages, other
sta costs, motor vehicles, premises, deprecia*on
on xed assets and other noninterest expenses.

e) Employee ProducGvity
The bank produc*vity is measured as per
employee contribu*on in loan and deposits. It
would be es*mated as Dit/Eit for deposits per
employee and Lit/Eit for loans per employee (In
order to account for ecient use of resources, we
further include performing loans per employee).

Asset Quality
Asset quality refers to the performance of the
loan porBolio.

a) Impaired Lending to Gross Advances [(NPLit/

GLit)]
The es*mate would be based on propor*on of
classied loans to total advances.

b) Sectoral DiversicaGon
four sectoral variables incorpora*ng the
propor*onate exposure to agriculture (Lagr),
tex*le (Ltex), energy (Len) and consumers (Lcons).

Liquidity [(LAit/DDit)]
Liquidity measures the extent to which a bank is
able to meet the withdrawal of funds. The liquid
assets would include cash and bank balances,
deposits with banks, government securi*es, listed
TFCs, listed equity investments and net reverse
repos.

Risk AbsorpGon Capacity

The risk absorp*on capacity refers to the cushion
available with banks against unforeseen losses.

Capital Adequacy RaGo [CARit]

Capital adequacy ra*o (CAR) is a regulatory scale
(proposed by BIS in Basle Accord) to determine
the banks capacity to absorb losses arising from
various risks. This ra*o compares banks core and
non core capital with risk weighted assets and a
minimum ra*o of 10% is required for a bank to
have adequate capital (Before December 2009,
the required capital adequacy was 8%).

 CAR is superior to equity to total assets for at

least two reasons. Firstly, it recognises dierent
risk levels for every asset and secondly, unlike
accoun*ng deni*on of equity, it considers two
*ers of capital.
The *er 1 consists of paid up capital and
disclosed reserves and is expected to absorb the
losses without requiring the liquida*on of the
bank.
The *er 2 capital comprises of non core capital
and includes undisclosed reserves, revalua*on
surplus, hybrid instruments and subordinated
loans. The *er 2 capital is expected to minimize
the losses of depositors in the extreme event of a
banks liquida*on.