How to read the P&L statement of banks and NBFCs?

The profit and loss (P&L) statement offers crucial insights into a business's financial performance. It highlights the income earned, expenses incurred, and profit generated by a business. The purpose of the P&L statement is common to all businesses-it serves as a crucial gauge for investors and other stakeholders to assess the financial waters of a company. However, the profit and loss transactions are often complex and different for non-financial companies. So, in this article, we have decoded the various components of the P&L statements of banks and non-banking financial companies (NBFCs) to make it easier for you to assess their financial health. Money makes money The role of interest For banks, the primary business involves accepting deposits from customers and issuing loans to individuals and businesses. They pay interest on the deposits and charge a higher interest on the loans. Here are two components: (i) interest earned, which is the income banks receive from customers who have taken loans, and (ii) interest expended, which is the cost banks incur as interest paid to depositors. The difference between interest earned and expended is called net interest income, and it is the primary source of revenue for banks. NBFCs also operate similarly to banks but with some differences. Unlike banks, NBFCs cannot accept deposits. Instead, they borrow money from other financial institutions and lend it out, earning interest on these loans. The interest they pay on borrowed funds i

This article was originally published on August 12, 2024.