Which Financial Ratios Matter Most for Banks, NBFCs and Insurers?

Almost every ratio built so far assumes a manufacturer: that borrowing funds the assets, that inventory is waiting to be sold, and that interest is a cost rather than a product. For a bank, a non-banking financial company (NBFC) or an insurer, the balance sheet is the business, so none of that holds. Applying a current ratio to a bank is not a small error; it asks a question those accounts cannot answer.

One fact sits underneath all of it. Each ratio built so far is arithmetic on figures Anjani Stationers Private Limited already published, and every one of them carries a silent assumption about the shape of the business the figures came out of. Current assets divided by current liabilities assumes there is a meaningful line between the two. Interest cover assumes interest is a charge somebody has to survive. Gearing assumes borrowing was raised to buy the machines. Nobody says assumptions that ordinary out loud, and the silence is exactly why they travel into places they do not fit. Stated out loud, each one points at the businesses where it collapses. The replacement measures themselves are defined and reported under the framework of the sector that uses them.

Why does the standard set break the moment the business is a lender?

Consider something that can be pictured before any accounting arrives. A cloth shop on a market street borrows from a moneylender, buys stock, sells it at a markup, and pays the moneylender out of the margin. Interest is the price of the borrowed money and it eats into what the shop keeps. One door down sits the moneylender's table. The money he has taken in from others is not a burden weighing on a trade he does elsewhere; lending it out at a higher rate is the entire trade. Asked what his interest cover is, he would ask which interest was meant. The interest he pays and the interest he receives are the two sides of the only business he has. Nothing about him is a harder version of the cloth shop. He is a different shape.

Each ratio breaks for its own separate reason, and none of the four breaks by drifting slowly out of range; each one loses the thing it was reading. Take them one at a time. The current ratio needs a split between what falls due inside a year and what does not, and it needs current assets that exist in order to be turned into cash. A bank's deposits are repayable on demand while its loans run for years, and that gap is not a liquidity problem to be measured, it is the business model itself being described. Interest cover needs interest to be a charge covered out of trading profit, and for a lender the interest received is the revenue the whole business exists to earn, so the measure ends up setting revenue against revenue. Gearing needs borrowing to be the funding raised to buy the assets that do the work, and for a bank the money taken in is the raw material that gets resold, closer to the paper Anjani Stationers buys than to the term loan it took. Inventory turnover has no referent at all: there is no shelf, no godown and no goods, so the words point at nothing.

What is the single difference underneath every one of those failures?

Four separate breakages look like four separate things to remember. The four are one fact seen four times.

For a manufacturer, finance funds the business and operations run it, and every ratio in the standard set measures across the line between the two; for a bank, an NBFC or an insurer, funding and operating are the same activity, so there is no line to measure across. Sit with that. Gearing compares the funding side with the equity side. Interest cover compares what operations earned with what the funding cost. The current ratio compares the short-term claims on the business with the short-term resources the operation is holding. Every one of them is a reading taken at a boundary. Anjani Stationers has that boundary: a term loan and a lease liability on one side, paper, machines, printing and school notebooks on the other. A lender does not. Money comes in, money goes out, and the difference between the two prices is the profit. The boundary the ratio wants to stand at is not a faint line in a lender's accounts. The boundary is not there at all.

The same fact explains why the failures cannot be repaired by adjustment. If the trouble were that a bank's current ratio were merely unusual, it could be rescaled, or banks compared with banks and the spread read off. But a measurement of something that is not being measured cannot be rescaled. The discipline is the same one that governs the ratios themselves: the arithmetic always produces a number, and a number appearing is not evidence that a question was asked.

What happens when Anjani Stationers' own ratios are pointed at a lender?

Abstract failures are easy to nod along with, so take the actual published readings and walk them across. Anjani Stationers Private Limited makes school notebooks and exercise books, holds 70 per cent of Chitra Binding Works, and its ratios are already computed: a current ratio of 4.25 times from current assets of Rs 1,19,00,000 against current liabilities of Rs 28,00,000, a quick ratio of 3.25 times, a cash ratio of 0.18 times, interest cover of 11.9 times, being earnings before interest and tax (EBIT) of Rs 41,50,000 set beside a finance cost of Rs 3,50,000, gearing of 6.7 per cent, asset turnover of 1.50 times from revenue of Rs 2,70,00,000, and a return on equity of 21.1 per cent. Every one of those is a real reading of a real shape.

One measure out of eight crosses the border intact, and the fact that it is the most familiar one is exactly what makes the other seven so easy to carry across without noticing. Each replacement belongs to the sector that reports it, and each is defined in that sector's own framework rather than in the standard set.

What does a bank get measured on instead?

Six measures come up again and again, and each one exists because a bank has a question a manufacturer never faces. Take them as names with a question attached, not as recipes.

Net interest marginThe gap between what a lender earns on the money it puts out and what it pays on the money it takes in, stated against the assets that do the earning. asks what is left from the gap between the two prices, stated against the assets that earn. The cost-to-income ratioWhat it costs to run the operation, staff, branches and systems, set against the income the operation produced in the same period. asks what it costs to run the operation against what the operation brings in. No measure comes closer to the efficiency question asset turnover was asking. Capital adequacyHow much of a lender's own money stands behind the risks it has taken on, measured against those risks rather than against the plain size of the balance sheet. The definition and the level are set by the regulator. asks how much of the bank's own money stands behind the risks it has taken, and it is the measure that stands where gearing stood, except that its definition is written by the regulator rather than chosen by the reader. Asset qualityMeasures of how much of what a lender has put out is not being repaid as agreed, and how the amounts have moved over the period. measures how much of what the bank lent is not coming back as agreed. Provision coverage asks how much has already been set aside against those loans. And a prescribed liquidity measure asks whether the bank can meet what is demanded of it, built on the stability of its funding rather than on a stock of current assets.

Five of those six have no counterpart at all in the standard set, and no clearer sign exists that this is a different framework rather than an adjusted one. There is a second signal worth holding on to. None of the ratios built earlier is prescribed by any accounting standard; they are conventions, and can be defined in any reasonable way so long as the definition is stated. Several of the measures just named are not conventions at all. The regulator defines them, specifies the inputs, and requires the bank to report them. The difference in status matters in one practical way: a working definition of a prescribed measure would be wrong the moment the official one moved, so each is read in the regulator's own text.

What changes when the lender is an NBFC rather than a bank?

An NBFC is a lender too, so most of the questions are the same questions and much of what was just named carries over. One thing changes, and it changes enough to move where a reader looks first.

Picture two households on the same street, both running on borrowed money. The first takes small deposits from neighbours who can ask for their money back any day but almost never do, and who keep coming back because the arrangement has held for years. The second borrows in larger amounts from three lenders, each with a fixed date on which the money must be returned in full. Both are lending it onward. On any calm day the two look identical. On the day the second household's lender declines to renew, they do not.

A bank funds itself largely from deposits while an NBFC funds itself in markets, so for an NBFC the funding mix, the maturity profile and the cost of borrowings carry weight that they simply do not carry for a bank, and the question a reader asks first is the asset-liability mismatchThe gap between when the money a lender has borrowed must be repaid and when the money it has lent out comes back. A mismatch is normal; the question is how large it is and how it would be met.. The mismatch is a comparison of two ladders: when the money borrowed must go back out of the door against when the money lent comes back in. Every lender has a gap there, and a gap is not a fault. The reader wants to know how large the gap is, where in the ladder it sits, and what would meet it if the borrowing could not be rolled over on the day it fell due. Gearing is the interesting near miss here. An NBFC's borrowings really are borrowings in the ordinary sense, so the measure is not meaningless in the way it is for a bank. Capital adequacy applies to NBFCs too, and a low borrowing figure paired with a bad maturity profile is not the reassurance it looks like, so gearing is still not read on its own.

What does an insurer measure instead?

An insurer moves further from a manufacturer than either lender does, and the reason is on the liabilities side rather than the assets side.

Four names come up. The combined ratioClaims paid and expected, plus the cost of running the business, set against the premium earned in the same period. The two halves are managed differently, so it is read in two parts. asks whether the underwriting itself works: claims and expenses set against premium earned, read in two parts because claims and running costs are managed by different people in different ways. The solvency ratioA regulator-defined comparison of the resources an insurer holds against the obligations it has taken on, so that claims can be met even if experience turns out worse than expected. asks whether the insurer can still meet what it has promised if experience turns out worse than assumed. The regulator defines the measure, not the reader. PersistencyIn life insurance, how much of the business written stays on the books and keeps paying, measured after a stated period has passed since it was written. asks, for life business, how much of what was sold stays on the books and keeps paying. And the investment yield asks what the money held between collecting a premium and paying a claim earned while it was sitting there. For many insurers a large part of the result comes from exactly that.

The deepest difference is that an insurer's liabilities are estimates of claims that have not been made yet and may never be made, rather than amounts owed today to somebody holding a document that says so. The estimate is a strange thing to set against everything above. Anjani Stationers' current liabilities of Rs 28,00,000 are invoices and dues with names attached; somebody on the other side is waiting to be paid, and the amount is not a matter of opinion. An insurer's largest liability is a number produced by an actuary about events that have not happened. Change the assumptions behind it and the liability moves, without a single claim being made or paid. A ratio built to compare resources against obligations therefore has to be defined by somebody with authority over the assumptions, and the reader cannot simply divide one published number by another and call the answer solvency.

Every setting of that panel can be read off in words. At the default the business is a manufacturer, all eight measures mean what they say, and the current ratio reads 4.25 times from current assets of Rs 1,19,00,000 against current liabilities of Rs 28,00,000. Switch to a bank and seven of the eight collapse, leaving return on equity as the only survivor, and every replacement named alongside them arrives without a number. Switch to an NBFC and the same seven collapse, but the notes move: the liquidity measures point at the maturity ladder, and gearing is marked as a near miss rather than a nonsense. An NBFC's borrowings really are borrowings. Switch to an insurer and the collapse is the same. Underneath it the reason changes: the liability side is a projection, so a ratio comparing resources against obligations has to be defined by somebody with authority over the assumptions. Three of the four settings show no figure at all, and the absence is the point.

Who reads these measures, and what do they take away from them?

Structure aside for a moment, three readers can open the same lender's report on the same afternoon carrying three unrelated questions, and only one of those questions is the one this guide has been circling.

A credit analyst looking at an NBFC as a borrower goes to the maturity profile first, an equity analyst covering a mixed list goes to whether the two kinds of business have been screened separately, and a household choosing where to keep money or which policy to hold is reading for something much simpler. The household question is whether the promise can still be met years from now. Watch each of them work. The credit analyst is not trying to score the NBFC out of ten. The question is narrow: if the wholesale funding could not be renewed on the day it fell due, what meets it, and how far into the ladder does the trouble reach. Everything else, including a comfortable-looking borrowing figure, is secondary to that one sequence.

The equity analyst has a different problem, and it is the one at issue here. A list that mixes manufacturers with lenders and insurers cannot be ranked on a single set of measures without producing a ranking that means nothing, so the working habit is to split the list before any measure is computed, and to say in the output which businesses were excluded and why. Vaidehi Rao runs the finance function at Anjani Stationers Private Limited, and she stands on the other side of that same habit. When her bank asks for the accounts, the bank is not going to read Anjani Stationers on capital adequacy, and when she reads her bank's annual report as a customer she should not be reading it on her own current ratio of 4.25 times. Each set of accounts answers to the framework built for its own shape.

The household reader has the most personal stakes and deserves the plainest treatment of the three. Somebody deciding where the savings sit, or holding a policy that is supposed to pay out decades from now, is asking whether the institution will be able to keep the promise. The measures that speak to that question are the regulator's own: capital and liquidity for a bank, solvency for an insurer. A household reader who looks at those and stops there has used exactly the right instrument, and a household reader who computes a current ratio from the published balance sheet has spent the afternoon on a number that was never about them.

How should a financial business's accounts be approached?

Four moves, in order, and the fourth is the one nobody teaches.

Start with the disclosures the regulator prescribes. The regulator designed them around the business model rather than adapting them to it, and they are where the measures that matter are both defined and reported. Second, resist the import. The habit of reaching for the standard set is strong precisely because it worked everywhere else, and the discipline is to notice that a measure computing cleanly is not the same as a measure meaning something. Third, expect the balance sheet to carry most of the information rather than the income statement. The manufacturer habit runs the other way round: for a lender the loan book and how it is behaving is the story, and the profit line is a consequence of it.

And fourth, where the sector's own framework is not to hand, the analyst says so. Recognising the limit of a tool is part of using it well rather than an admission of a failure to learn something. This is worth being precise about. Nobody arrives with every framework. A reader who has built the standard set carefully and honestly is properly equipped for a very large share of the businesses they will ever look at, and is not equipped for a bank, an NBFC or an insurer without a second body of work that takes real time. Writing "outside what I can assess with what I have" is a finding. The stated limit is far more useful to whoever reads it than a sheet of computed ratios that describe nothing, and it is the only version of the output that can be trusted the next time it says something confident. A carpenter's rule measures wood beautifully and does not measure temperature, and nobody thinks less of the rule.

Anjani Stationers Private Limited, Chitra Binding Works and Vaidehi Rao are invented.
Educational material. Not advice on any investment, tax, budget or market position.