April 20, 2026
4 mins read
Financial ratios provide various measures of a bank's unknowns and uncertainties, operational efficiencies, and overall stability. GNPA and NNPA assess asset quality, while PCR measures provisioning strength; Capital Adequacy Ratio (CAR) measures an institution's ability to meet its future obligations (i.e., solvency), and CASA ratio is indicative of obtaining low-cost funds.
Analysing banks through their financial ratios will accomplish two goals. First, to determine how well a bank has managed its risk and capital. And provide insight into the type of activity undertaken by the bank as well as its financial health.
The analysis of financial ratios is not limited to the above two goals; they also provide a wealth of information regarding the bank's profitability and the quality of its assets. A proper understanding of financial ratios is critical for evaluating the overall stability of any financial institution.
Ratios are indicators, not standalone conclusions
Gross Non-Performing Asset Ratio: The total amount of loans that are no longer generating income for the bank is expressed as a percentage of total loans disbursed to enable an investor to see the full extent of the bank's portfolio that is currently composed of unproductive assets.
Net Non-Performing Asset Ratio: To provide an accurate representation of a bank's credit risk, the GNPA ratio is adjusted for provisions made by a bank to reflect the percentage of net advances that remain unproductive after provision for potential losses.
Importance of Lower Ratios: Maintaining higher quality loan portfolios typically means lower GNPA and NNPA ratios, as well as higher efficiency in managing loans, which reduces stress on the bank’s balance sheet.
Quarterly Reports and Public Disclosure: All banks report GNPA and NNPA ratios on a quarterly basis to their shareholders in quarterly financial results and regulatory disclosures. These published ratios enable financial analysts to monitor the quality of bank assets over time, allowing them to assess the long-term viability of the banks' core lending operations.
Read Also: Popular Banks In India 2025
Provisioning Coverage Ratio measures the extent to which a bank has made provisions for bad loans.
PCR Formula: (Total Provisions / Gross NPAs) x 100
A higher PCR indicates the bank is more prepared to absorb losses from NPAs.
It helps safeguard depositors' interests in case of defaults.
PCR above 70% is generally considered a healthy benchmark by some industry observers, though this is not a regulatory mandate.
This ratio helps assess how conservatively a bank has accounted for potential loan losses.
The Capital Adequacy Ratio (CAR) reflects a bank's ability to meet its obligations and absorb potential losses. It is a critical indicator under Basel norms.
CAR Formula: (Tier 1 + Tier 2 Capital) / Risk-Weighted Assets
The Reserve Bank of India requires Indian banks to maintain a CAR of at least 9%.
A higher CAR implies the bank has adequate capital to cover risk-weighted assets.
This ratio ensures that banks operate securely, minimising the risk of insolvency.
CASA ratio indicates the proportion of a bank's deposits that are in current and savings accounts.
CASA Formula: (CASA Deposits / Total Deposits) x 100
A higher CASA ratio is typically beneficial, as these accounts have lower interest obligations.
It helps in reducing the bank’s cost of funds.
Banks with a higher CASA ratio generally have stronger liquidity positions.
Tracking this ratio helps analyse how efficiently a bank is sourcing low-cost deposits.
Core Profitability Measurement: Net Interest Margin (NIM) measures the difference between how much interest a bank collects on loans and how much interest it pays on deposits. A bank with a healthy NIM is earning a higher interest spread from lending activities.
Operational Efficiency Indicator: NIM provides an indicator of how well a bank can operate its loan and deposit portfolios. By measuring the NIM over time, analysts will be able to see whether the bank is doing a good job at pricing its loans and keeping its deposit cost low.
Impact of Market Strategy: Banks typically use different strategies based on the mix of assets they hold, current interest rates, and their overall corporate direction. The changes in NIM will allow analysts to evaluate how effectively a bank can adjust to economic fluctuations while still producing income.
The price-to-book ratio compares a bank's market valuation to its book value.
P/B Formula: Market Price per Share / Book Value per Share
A lower P/B ratio may indicate undervaluation, whereas a higher ratio could reflect investor confidence.
Investors widely use it to assess whether a bank’s stock is reasonably priced.
This ratio is applicable when comparing banks with similar asset bases but varying market performances.
Additional Read: Difference Between Gross NPA And Net NPA
To assess a bank's financial health, examine its capital adequacy, asset quality, earnings, and liquidity. Review key financial statements and regulatory disclosures to ensure compliance. Consistent profitability, strong credit quality, and adequate capital buffers typically indicate a bank is financially sound.
Important ratios include Capital Adequacy Ratio (CAR), Return on Assets (ROA), Net Interest Margin (NIM), and Gross Non-Performing Assets (GNPA). These indicators help gauge a bank’s ability to absorb losses, generate profits, manage loans, and maintain operational efficiency.
The Capital Adequacy Ratio (CAR) is often considered the best measure. It reflects a bank’s capacity to absorb losses and protect depositors. A higher CAR indicates strong capital buffers and regulatory compliance, essential for long-term stability and financial resilience.
Key ratios include CAR, ROA, ROE (Return on Equity), NIM, GNPA, Net NPA, Cost-to-Income Ratio, and Liquidity Coverage Ratio (LCR). These help analysts evaluate profitability, asset quality, capital strength, and liquidity in assessing a bank’s performance.
Disclaimer :
The information on this website is provided on "AS IS" basis. Bajaj Broking (BFSL) does not warrant the accuracy of the information given herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or suitability for any particular purpose. While BFSL strives to ensure accuracy, it does not guarantee the completeness, reliability, or timeliness of the information. Users are advised to independently verify details and stay updated with any changes.
The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.
Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.
BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.
Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
For more disclaimer, check here : https://www.bajajbroking.in/disclaimer
Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading
Enjoy low brokerage on delivery trades
|
Open Your Free Demat Account
Enjoy low brokerage on delivery trades
|
