Stock market ki paathshala (Ep 1)- Basics of Banking sector with @AdityaD_Shah

The speaker is reintroducing himself on social media after a long break due to academic commitments. He is excited to have a guest, Aditya Shah, who has been contributing to their Twitter spaces discussions about simplifying the banking and finance sectors for laypeople. They aim to help retail investors understand these complex topics better.

Aditya Shah begins by explaining their goal to educate people on personal finance and fundamental stock analysis without focusing on trading. They plan to discuss the banking sector basics to provide greater understanding, making it accessible to retail investors.

The video aims to clarify how banks earn money. Aditya explains that banks earn from the differential interest rates between loans and deposits. They borrow from depositors at a lower interest rate and lend at a higher rate, the difference being their primary income source.

Aditya continues to describe banks' auxiliary income from selling financial products like insurance and mutual funds, from which they earn commissions. He also explains how banks classify assets and liabilities: loans given are assets, while deposits are liabilities since they need repayment on demand.

The discussion moves to safety margins like Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) that banks must maintain with the central bank. These exist to protect depositors and maintain liquidity, ensuring banks can honor withdrawals even in financial stress.

A comparison is made between banks and Non-Banking Financial Companies (NBFCs). Unlike banks, NBFCs don't have CRR or SLR requirements, allowing them to lend more of their capital. This section also emphasizes monitoring liquidity coverage ratios to ensure banks can meet redemption demands.

Aditya delves deeper into cost of funds, an essential metric for banks, impacting their profitability. Banks with lower costs of funds have an advantage, allowing them to operate profitably even in inflationary environments. Smaller banks often have higher costs.

The discussion now focuses on how banks should strategize loans. Lending at higher interest rates often indicates higher risk. Therefore, understanding the interest rates at which different banks lend helps assess the risk level in their portfolios.

Aditya highlights the significance of analyzing secured vs. unsecured loans. Secured loans, though lower in interest rates, are backed by collateral, posing less risk. In contrast, unsecured loans can lead to higher defaults, affecting the bank’s asset quality.

The speaker explains Non-Performing Assets (NPAs) and how banks classify overdue loans under different categories, with provisions against potential defaults. The importance of managing NPAs is emphasized as they can affect banks' financial health.