Asset Quality Asset Quality
The ability of a financial institution to collect its loans and advances without incurring losses. A measure of credit risk in the loan portfolio.
Professional Application:
HDFC Bank's consistently low GNPA (1.1% average over 10 years) reflects superior asset quality compared to industry average of 2.8%.
CASA (Current Account Savings Account) Banking
Low-cost deposits that form the foundation of a bank's competitive advantage. CASA deposits typically cost 1-3% compared to 6-8% for term deposits.
Calculation Formula:
CASA Ratio = (Current Account + Savings Account) / Total Deposits × 100
CASA Cost = Interest Paid on CASA / Average CASA Balance × 100
Real Example - ICICI Bank:
CASA Deposits: ₹8,50,000 croreTotal Deposits: ₹19,50,000 crore
CASA Ratio: 42.1%
Cost Advantage: 3-4% vs term deposits
Credit Cost Asset Quality
The percentage of total assets that a bank provisions for potential loan losses. A key indicator of asset quality trends and profitability impact.
Calculation Formula:
Credit Cost = Total Provisions / Average Total Assets × 100
Normalized Credit Cost = Credit Cost adjusted for one-time items
Professional Benchmarks:
Excellent: < 0.5%Good: 0.5-1.0%
Warning: > 1.5%
Example: HDFC Bank's 10-year average credit cost: 0.4%
Cost-to-Income Ratio Operations
Measures operational efficiency by comparing operating expenses to total income. Lower ratios indicate better efficiency and operational leverage.
Calculation Formula:
Cost-to-Income = Operating Expenses / Total Income × 100
Adjusted C/I = (OpEx - One-time items) / Core Income × 100
Professional Interpretation:
Growing Banks: 50-60% (investment phase)Mature Banks: 35-45% (efficiency focus)
HDFC Bank: 38% (best-in-class efficiency)
EBLR (External Benchmark Lending Rate) Banking
Lending rate linked to external benchmarks like Repo Rate, ensuring faster transmission of monetary policy changes to borrowers.
Calculation Framework:
EBLR = External Benchmark + Bank's Spread
Common Benchmarks: Repo Rate, 3M T-Bill, 6M T-Bill
Rate Transmission Example:
Repo Rate: 6.5%Bank Spread: 2.0%
EBLR: 8.5%
Changes immediately with repo rate movement
GNPA (Gross Non-Performing Assets) Asset Quality
Total value of loans where payments have been overdue for 90+ days, before adjusting for provisions. Primary indicator of loan portfolio health.
Calculation Formula:
GNPA % = Gross NPAs / Gross Advances × 100
Slippage Rate = Fresh NPAs / Opening Standard Assets × 100
Professional Benchmarks:
Excellent: < 1.5%Good: 1.5-2.5%
Acceptable: 2.5-3.5%
Warning: > 3.5%
MCLR (Marginal Cost of Lending Rate) Banking
Internal benchmark for banks to price loans based on marginal cost of funds, operating costs, and regulatory requirements.
Calculation Components:
MCLR = MCF + Negative Carry + Operating Cost + Tenor Premium
MCF = Marginal Cost of Funds (deposit + borrowing costs)
MCLR Reset Example:
Banks review MCLR monthly based on cost changes. Unlike EBLR, MCLR changes are bank-specific and may not reflect repo rate movements immediately.
NIM (Net Interest Margin) Banking
The spread between interest earned on assets and interest paid on liabilities, expressed as percentage of average interest-earning assets. Core profitability metric for banks.
Professional Calculation:
NIM = (Interest Income - Interest Expense) / Average Interest-Earning Assets × 100
Domestic NIM = NIM adjusted for overseas operations
NIM Leaders (FY24):
HDFC Bank: 4.1% (industry-leading efficiency)ICICI Bank: 3.6% (balanced approach)
Kotak Bank: 4.5% (premium positioning)
System Average: 3.2%
NNPA (Net Non-Performing Assets) Asset Quality
Gross NPAs minus provisions made against them, representing the actual loss exposure to the bank's balance sheet.
Calculation Formula:
NNPA = Gross NPAs - Provisions Made
NNPA % = NNPA / Net Advances × 100
Professional Analysis:
NNPA Impact: Directly reduces book value and profitabilityRecovery Potential: Lower NNPA indicates better provisioning coverage
Target: NNPA < 1% for quality banks
PCR (Provision Coverage Ratio) Asset Quality
Percentage of gross NPAs covered by provisions, indicating the bank's preparedness for potential losses and conservative approach to problem loans.
Calculation Formula:
PCR = Total Provisions / Gross NPAs × 100
Prudential PCR = (Specific + General Provisions) / GNPA × 100
Professional Benchmarks:
Excellent: > 80% (Conservative provisioning)Good: 65-80% (Adequate coverage)
Weak: < 50% (Insufficient provisioning)
Higher PCR = Lower future earnings volatility
ROE (Return on Equity) Valuation
Measures how efficiently a bank uses shareholders' equity to generate profits. Critical metric for evaluating management performance and shareholder value creation.
Professional Analysis Framework:
ROE = Net Profit / Average Shareholders' Equity × 100
DuPont: ROE = (NI/Revenue) × (Revenue/Assets) × (Assets/Equity)
ROE Leaders & Analysis:
Bajaj Finance: 22%+ (NBFC efficiency)HDFC Bank: 16.5% (Sustainable excellence)
Target for Banks: 15%+ for quality rating
Target for NBFCs: 18%+ for growth companies
AUM (Assets Under Management) NBFC
Total value of assets managed by financial institutions. For NBFCs, represents loan book size; for AMCs, represents mutual fund assets managed.
Growth Analysis:
AUM Growth = (Current AUM - Previous AUM) / Previous AUM × 100
Compound AUM Growth = [(Ending AUM/Starting AUM)^(1/years)] - 1
AUM Growth Examples:
Bajaj Finance: ₹2,75,000 cr (28% CAGR over 5 years)HDFC AMC: ₹4,30,000 cr (Market appreciation + flows)
System Benchmark: 15% credit growth for NBFCs
Co-lending NBFC
Partnership model where banks and NBFCs jointly lend to borrowers, combining bank's low-cost funds with NBFC's specialized origination and servicing capabilities.
Economics Framework:
Bank Share = 80% of loan amount (lower cost funding)
NBFC Share = 20% of loan amount (higher yield)
Fee Income = Origination + Servicing + Collection fees
Co-lending Success Story:
Aavas Financiers: 40% of business through co-lending partnershipsBenefits: Lower funding cost, maintained customer relationships
ROE Impact: Fee income improves asset-light returns
CAR (Capital Adequacy Ratio) Regulation
Minimum capital that financial institutions must maintain relative to risk-weighted assets, ensuring adequate buffer for potential losses.
Regulatory Framework:
CAR = (Tier 1 + Tier 2 Capital) / Risk Weighted Assets × 100
CET1 Ratio = Common Equity Tier 1 / RWA × 100
Regulatory Requirements:
Banks: Minimum 11.5% (9% + 2.5% buffer)NBFCs: Minimum 15% for systemically important
Best Practice: Maintain 200-300 bps above minimum
P/B Ratio (Price-to-Book) Valuation
Primary valuation metric for financial stocks, comparing market value to book value. Reflects market's assessment of franchise value and ROE sustainability.
Valuation Framework:
P/B Ratio = Market Price per Share / Book Value per Share
Justified P/B = ROE / (Cost of Equity - Growth Rate)
P/B Analysis by Quality:
Premium Banks (HDFC): 3.0-4.0x P/BQuality Banks (ICICI): 2.0-3.0x P/B
Growth NBFCs: 4.0-8.0x P/B
Value Plays: 1.0-1.5x P/B
JAWS Ratio Operations
Measures positive operating leverage by comparing income growth rate to expense growth rate. Positive JAWS indicates improving efficiency.
Calculation Method:
JAWS = Income Growth Rate - Expense Growth Rate
Positive JAWS = Revenue growing faster than costs
Operational Excellence Example:
ICICI Bank FY24:Income Growth: +18%
Expense Growth: +12%
JAWS: +6% (Strong operating leverage)
🎧 Audio Guide: Financial Terminology Mastery
Navigate this comprehensive glossary like a professional:
Audio Guide: Professional pronunciation guide for financial sector terminology