Basis point

One percent equals 100 basis points. A move from 5% to 6% is a rise of one percentage point, or 100 basis points.

Analysts use basis points because plain percentages can be read two ways. "Margin fell 2%" could mean it fell by two percentage points, or it could mean it fell by 2% of its own value. "Margin fell 200 basis points" can only mean one thing: it fell by exactly two percentage points. That precision matters when the numbers being compared are already percentages, like margins and interest rates.

The workbook's own example: Bharti Airtel's EBITDA margin was 36.6% in FY2018 and 32.2% in FY2019.

36.6% − 32.2% = 4.4 percentage points = 440 basis points

The workbook states this directly — the FY2019 margin is "approximately 440 basis points lower than 36.6%." Note what basis points are measuring here: the absolute gap between the two percentages, not the percentage by which the margin itself shrank (which would be a much larger number, since 4.4 percentage points is a 12% relative fall from 36.6%).

A bank reports its net interest margin (NIM) falling from 3.85% to 3.55% — a drop of 30 basis points. In percentage terms alone, "0.3%" sounds trivial.

But on a loan book of Rs 12,00,000 crore, 30 basis points of margin is real money: 12,00,000 × 0.30% = Rs 3,600 crore of interest income given up in a single year. Stating the move in basis points, rather than as "0.3%," is exactly what stops an analyst from underrating how much a small-looking margin change actually costs.

Chapter 8.10, in the ratio-analysis discussion of Bharti Airtel's expense ratios, uses basis points to describe year-on-year margin changes. Expect a question that gives two percentage figures and asks for the change in basis points, or one that tests the difference between an absolute (percentage-point) change and a relative (percentage) change.

• 440 basis points is 4.4 percentage points, not 4.4% and not 440%. Confusing "basis points" with "percent" is the single most common slip.
• A change stated in basis points is always an absolute difference between two percentages. Do not convert it into a relative percentage change without being asked to.