Banks and NBFC

Business model

Banks and Non-Banking Financial Companies (NBFCs) make money on the spread between what they charge borrowers and what they pay depositors / lenders. They also earn fee income (processing, payments, third-party distribution).

Banks raise low-cost deposits from the public (savings + current = CASA, and term deposits). NBFCs raise from banks, bond markets, and commercial paper - usually higher cost.

Key metrics

• Net Interest Margin (NIM) - interest earned minus interest paid, as a % of average earning assets. Bank NIMs are 3-4% in India; NBFC NIMs vary widely.
• Cost-to-income ratio - operating costs vs operating income. Below 45% is efficient; above 55% is bloated.
• Asset quality - Gross NPA% (loans in default), Net NPA% (after provisions). Below 2% gross NPA is healthy for private banks; below 4% for NBFCs.
• Credit cost - provisions made as a % of advances. Spikes signal pain.
• CASA ratio (banks only) - savings + current account deposits / total deposits. Higher = lower funding cost.
• CAR / CRAR - capital adequacy ratio. Regulatory minimum is 11.5% for banks, 15% for NBFCs.
• Return on Assets (RoA) - 1.5-2.0% is good for banks; varies for NBFCs.
• Return on Equity (RoE) - 16-20% is good.