How to read the balance sheet of banks and NBFCs?

In a previous story, we detailed how the profit and loss statement of banks and non-banking financial companies (NBFCs) differs from others. The next step is to explain what makes their balance sheet unique, and different from that of non-financial companies. A balance sheet shows a company's financial position at a particular moment, represented by what it owns (assets), what it owes (liabilities), and the difference between the two (shareholder's equity). For banks and NBFCs, the nature of assets and liabilities differ due to their unique operations. Let's understand how: How are liabilities different? We know that a bank takes capital or deposits by customers in various accounts like savings, current, fixed, and recurring. This money is the primary source of funds for the bank, used for daily operations and lending. Deposits are classified as liabilities on a bank's balance sheet because they represent money that the bank owes to its customers. For example, HDFC Bank's deposits made up 66 per cent of its total liabilities in FY24. Other obligations include loans or borrowings that the bank takes to run its business. For NBFCs, the primary source of funds is the money they borrow from banks or other financial institutions, which are then used to fund their lending operations. These borrowings form a significant part of an NBFC's liabilities. For example, India's largest NBFC Bajaj Finance's borrowings constituted 61 per cent of its total liabilities in FY24. How are assets different? An asset is a source of income for any business. Banks earn income in the form of interest charged on the loans they lend out. Therefore, a major portion of their assets is the portfolio of loans or advances lent out in different segments like housing, automobile, or personal use. For instance, around 69 per cent of HDFC Bank's total assets in FY24 were advances. The more loans a bank gives, the more money it earns. Factors like economic growth, attractive interest rates, or the bank's ability to reach more customers support this growth. However, it's important to be cautious as rapid growth in advances might mean loans are being given to

This article was originally published on August 23, 2024.