A lender without a deposit franchise

An NBFC (non-banking financial company) makes loans much as a bank does — to buy a phone, a car, a house, to run a small business. The difference is on the other side of the balance sheet. The Reserve Bank of India’s FAQ on NBFCs (updated as on 15 September 2026) lists the differences from banks plainly: NBFCs cannot accept demand deposits, they aren’t part of the payment and settlement system (no cheques drawn on themselves), and deposits with the NBFCs specifically licensed to take them are not insured by the DICGC (Deposit Insurance and Credit Guarantee Corporation). Those that may take public deposits can only take ones repayable after 12 months and within 60 months.

“No demand deposits” means no current and savings accounts — no CASA, the cheap, sticky funding that the banks module showed is a bank’s biggest advantage. An NBFC borrows instead: from banks, by issuing bonds and commercial paper in the money market, from abroad, and (if licensed) through fixed deposits. Three things follow:

  1. Its money costs more, so it has to lend at higher rates to earn a spread — which usually means lending to riskier or more specialised borrowers.
  2. It runs with less leverage than a bank, so its return on assets has to be higher to reach a similar return on equity.
  3. It has to keep refinancing. Borrowed money comes due on a schedule, whether or not markets are willing to lend again that week. Matching when money comes in against when it goes out — asset-liability management (ALM) — is a survival skill, not a technicality.

The formulas

Spread                   ≈  yield on loans  −  cost of funds
NII margin               =  net interest income  /  average loan assets
                            (the NBFC version of NIM, net interest margin)
ROE (return on equity)   =  ROA (return on assets)  ×  (average assets / average equity)

ALM cumulative gap       =  cumulative inflows − cumulative outflows,
                            bucket by bucket, from 1 day out to 5+ years
Cumulative gap %         =  cumulative gap / cumulative outflows

A positive gap in a bucket means more money is due in than out by then. A negative gap in the short buckets means the lender needs to borrow again (or sell assets) just to pay what it owes.

Worked example: Bajaj Finance, FY26, next to HDFC Bank

Bajaj Finance figures from its Q4 FY26 investor presentation (29 April 2026), consolidated, as reported (after the one-time provisions it separately discloses). HDFC Bank figures are the FY25 numbers from the banks module, some reported and some computed by this blog. Different years and slightly different denominators — read this as a comparison of structure, not a precise ranking. Historical, for illustration only.

HDFC Bank (FY25) Bajaj Finance (FY26)
Cheap current and savings deposits (CASA) 34.8% of deposits None — not permitted
Deposits as a share of borrowed funds 83.2% 16% (fixed deposits only)
Cost of funds 5.64% 7.54%
Yield (interest income ÷ average earning assets / loans) 9.05% 16.05%
Net interest income ÷ same base 3.69% 9.73%
Credit cost (loan losses ÷ average loans) 0.5% 2.09%
ROA (profit after tax ÷ average assets or loans) 1.79% 4.26%
Leverage (assets ÷ equity) 8x about 4.2x

Bajaj Finance’s “average loans” here is average assets under finance (AUF) — the loans on its books — at ₹4,53,394 crore. Its ROA in the table is reported PAT over that base; the company’s own figure before one-time provisions is 4.6%. The leverage figure is the company’s pre-one-off ROE divided by its ROA (19.2% ÷ 4.6%), an approximation. On the bank side, “earning assets” include its large bond portfolio, which yields less than loans — one reason its yield looks so much lower.

Step 1: funding costs more

  1. Bajaj Finance’s borrowing mix at 31 March 2026 was 48% money markets, 31% bank loans, 16% deposits and 5% external commercial borrowings (loans from abroad). None of it is CASA.
  2. Its cost of funds was 7.54% against 5.64% for HDFC Bank a year earlier. The company reports it fell 43 basis points from FY25’s 7.97%. Because it borrows at market rates, an NBFC’s cost of funds moves with those markets, in both directions.

Step 2: so it lends differently

  1. Its yield on loans was about 16.05% — far above the bank’s. That’s what a lender without cheap deposits has to do: lend where rates are higher. The presentation splits its loans (by AUM, assets under management) as 30% urban, 11% rural, 14% MSME (micro, small and medium enterprises), 13% commercial and 32% mortgages.
  2. Higher-yield lending costs more to run and loses more to defaults. Its operating costs were about 3.92% of average loans and loan losses 2.09%, against a 0.5% credit cost at the bank. The wide spread is paying for those costs; it isn’t pure profit.

Step 3: higher ROA, lower leverage

  1. What’s left is a much higher return on assets — 4.26% on reported profit — but on far less leverage. The company’s ROE before one-time items was 19.2% (18.1% after them), against HDFC Bank’s 14.4% in FY25. Same identity as in the price-to-book post: ROE = ROA × leverage. The two lenders get there by opposite routes.

Step 4: the ALM table

The presentation includes Bajaj Finance’s (standalone) behavioural ALM statement at 31 March 2026 — “behavioural” meaning cash flows are bucketed by when the company expects them (allowing for early repayments, for example), not only by contract dates. ₹ crore:

Time bucket Inflows Outflows Cumulative gap Cumulative gap %
1-7 days 30,545 24,632 5,912 24%
8-14 days 2,955 6,256 2,611 8%
15-30 days 22,208 10,183 14,636 36%
1-2 months 21,172 15,550 20,258 36%
2-3 months 18,354 17,543 21,069 28%
3-6 months 46,483 22,481 45,071 47%
6 months-1 year 87,742 57,578 75,235 49%
1-3 years 1,42,026 1,14,874 1,02,386 38%
3-5 years 38,494 43,309 97,571 31%
over 5 years 46,159 1,43,729 0 0%
  1. In every bucket up to five years, more money was due in than out cumulatively. The company shows the limits it’s held to for the first three buckets as permissible negative gaps of −10%, −10% and −20%; its gaps there were positive.
  2. The last bucket closes the table: shareholders’ capital sits in “over 5 years” as an outflow that never actually comes due, so the cumulative gap ends at zero by construction.
  3. Refinancing never stops. Of about ₹3,29,907 crore of borrowings in the table, ₹1,40,052 crore — 42% — falls due within a year. The presentation also reports a daily average liquidity coverage ratio (LCR — liquid assets held against 30 days of stressed outflows) of 228% in the March quarter, against a 100% requirement.

None of this is a view on Bajaj Finance. It’s one year’s disclosures, read through the lens that separates an NBFC from a bank.

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

Two friends lend pocket money to classmates.

The first friend’s class keeps its spare money with her for free — she’s the class piggy bank. She lends it out at a little interest and keeps the difference.

The second friend has no free piggy-bank money. She has to borrow from an older cousin who charges her interest. To make anything, she lends to classmates who pay more interest — often the ones the first friend wouldn’t lend to. She earns more on each loan, but more of her borrowers forget to pay back.

And every few weeks, the cousin wants his money back. If he ever says “no more loans this month”, she’d better have enough coming in to pay him. That’s ALM.

Common mistakes

  • Comparing an NBFC’s margin with a bank’s and calling the NBFC more profitable. A higher yield usually comes with higher operating costs and credit losses. Compare what’s left after both — ROA — and then remember the leverage difference.
  • Ignoring where the money comes from. Two NBFCs with the same margin can have very different risks if one borrows long-term and the other leans on short-term market paper. Read the borrowing mix and the ALM table, not just the P&L (profit and loss statement).
  • Treating NBFC fixed deposits like bank deposits. Per the RBI, they are term deposits (12 to 60 months), not repayable on demand, and not covered by DICGC insurance.
  • Taking “before one-time items” as the headline. Bajaj Finance discloses both: ROA of 4.6% before its one-time provisions and 4.3% after. Those provisions were real costs; use the adjusted figure to understand trend, not to replace the reported one.

Takeaway: An NBFC lends like a bank but can’t take current or savings deposits, so it pays more for money, lends at higher rates to riskier borrowers, and runs on less leverage. Judge it on what’s left after credit losses, and read its funding mix and ALM table, because it must keep refinancing.