Banks and finance companies make up a huge chunk of the Indian market, but you can't analyse them like a normal business — their raw material and their product are both money. A few special numbers tell you whether a lender is healthy. This is for learning only.
How a bank actually earns
A bank takes deposits (paying a low rate) and lends them out (at a higher rate). The gap between the two is its core profit. So the key questions are: how wide is that gap, how safe are the loans, and how cheap is the funding?
The numbers that matter
- NIM (Net Interest Margin) — the spread between what the bank earns on loans and pays on deposits. A higher, stable NIM means a more profitable lender.
- NPA (Non-Performing Assets) — loans that have stopped being repaid. This is the big risk. Watch Gross NPA and Net NPA percentages; rising NPAs are the clearest sign of trouble.
- CASA ratio — the share of deposits in low-cost current and savings accounts. A high CASA means cheap, sticky funding, which protects the NIM.
- Provision Coverage — how much the bank has set aside against bad loans. Higher coverage is safer.
- Capital Adequacy (CAR) — the cushion of capital against losses, regulated by the RBI.
- Credit growth — how fast the loan book is expanding (too slow is stagnation; too fast can mean reckless lending).
NBFCs: similar, but riskier funding
Non-Banking Financial Companies also lend, but they can't take regular deposits, so they borrow wholesale from banks and markets. That makes them far more sensitive to interest rates and to liquidity crunches — when funding dries up, even a good NBFC can seize up. Their NIM, NPA and borrowing mix are the things to watch.
The big risks
Lenders live and die by the credit cycle. In good times loans look pristine; in a downturn, NPAs surge and profits evaporate. Interest-rate swings, over-lending to one sector, and governance lapses are the recurring dangers.
This is a framework for understanding the sector, not a recommendation on any stock. For the general method, see how to analyse any sector, and for how rates move lenders, what moves the market.
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