How to Evaluate an NCD Issuer's Financials
NBFCs (Non-Banking Financial Companies) issue the majority of retail-accessible NCDs in India. They are the Shriram Finances, Muthoot Capitals, Bajaj Finances, and PFC-equivalent private lenders that make up the screener. Understanding how an NBFC balance sheet works is not optional if you are buying their bonds — it is the foundation of every credit decision.
Why NBFCs dominate the NCD market
Banks can raise money by accepting deposits — a stable, cheap funding source. NBFCs cannot take public deposits (with limited exceptions). They must borrow from the market: bank loans, commercial paper, and most visibly, NCDs sold to retail and institutional investors.
This creates a direct relationship between you as a bondholder and the NBFC’s business: your money funds their loans. Their ability to repay you depends on whether their borrowers repay them. The NBFC is the credit intermediary — and evaluating that intermediary is the job.
The NBFC balance sheet in plain English
An NBFC balance sheet has a simpler structure than a manufacturing company but its own set of risk indicators:
| Side | Main items | What to look at |
|---|---|---|
| Assets | Loan and advances (the loan book), investments, cash & equivalents | Total size, growth rate, composition (secured vs unsecured, sector concentration) |
| Liabilities | Bank borrowings, NCDs, commercial paper, subordinated debt | Borrowing mix, tenor (short vs long), concentration in any single lender |
| Equity | Share capital, retained earnings, reserves (= net worth) | Size relative to total borrowings — this is the leverage calculation |
The three numbers that matter most
1. Leverage (Debt-to-Net Worth)
This is the single most important number. It tells you how much borrowed money the NBFC is using for every rupee of its own equity:
Leverage = Total Borrowings ÷ Net Worth
A leverage ratio of 5x means: for every ₹5 the NBFC lends out, ₹5 is borrowed and only ₹1 is its own capital. If 20% of the loan book defaults (a severe scenario), the entire equity is wiped out and lenders start taking losses.
| Leverage ratio | What it typically means |
|---|---|
| Below 3x | Conservative; well-capitalised relative to assets |
| 3x – 6x | Moderate; within comfortable range for most NBFC categories |
| 6x – 8x | Standard for well-run large NBFCs (e.g., large HFCs) |
| Above 8x | High; thin equity cushion — more sensitive to asset quality deterioration |
| Above 10x | Warrants close scrutiny of asset quality and liquidity |
Trend matters as much as the absolute number. If leverage has moved from 4x to 7x over three years, understand why: is it intentional growth, or is equity being eroded by losses?
2. Gross NPA Ratio
NPA stands for Non-Performing Asset — a loan where the borrower has not paid for 90+ days. The Gross NPA ratio is:
Gross NPA % = Gross NPAs ÷ Total Loan Book × 100
A 3% Gross NPA means 3% of the loan book is in default or near-default. For context:
- Large, well-run NBFCs (housing finance, vehicle finance) tend to maintain Gross NPA below 2–3%
- Unsecured consumer lending NBFCs may run at 3–5% normally
- Gross NPA above 5–6% is elevated and warrants investigation
- Rapidly rising NPA (from 2% to 5% in one year) is a red flag regardless of the absolute level
Always look at Net NPA as well — this is after deducting provisions (money set aside for expected losses). A low Net NPA despite high Gross NPA means the NBFC is aggressively provisioning, which is prudent. A high Net NPA means the company is not providing adequately for its bad loans.
3. Capital Adequacy Ratio (CAR)
RBI requires all registered NBFCs to maintain a minimum Capital Adequacy Ratio — the ratio of capital (equity + qualifying debt) to risk-weighted assets. The minimum is currently 15% for systemically important NBFCs (NBFC-SI).
A CAR well above the minimum (say, 20%+) means the NBFC has a buffer before it hits regulatory limits. A CAR close to the 15% floor means limited ability to grow without raising more equity. If the CAR is declining, the NBFC is consuming capital faster than it is generating it — unsustainable without a capital raise.
Reading the P&L: three things to check
Net Interest Margin (NIM): The difference between what the NBFC earns on its loans and what it pays on its borrowings, as a percentage of total assets. A NIM of 4–6% is healthy for most NBFC categories. Falling NIMs mean the NBFC is paying more to borrow (liquidity stress) or earning less (competitive pressure).
Credit costs (provisions): The amount the NBFC charges to its P&L to cover expected loan losses. High credit costs reduce profits but reflect prudent management. An NBFC showing very low credit costs despite rising NPAs is deferring the recognition of bad loans — a warning sign.
Return on Assets (RoA): Net profit as a percentage of total assets. A well-run NBFC typically delivers 1.5–3% RoA. Below 1% in normal conditions suggests thin margins or high credit costs. Consistent RoA helps confirm that the NBFC can build equity organically rather than relying entirely on external capital.
ALM risk: the hidden danger in borrowing short, lending long
NBFCs typically borrow short (commercial paper, short-term bank loans) and lend long (3–7 year vehicle or housing loans). This creates a maturity mismatch — the NBFC must constantly refinance its short-term liabilities to keep funding its long-term assets.
In normal market conditions, this works smoothly. In a stressed environment — when lenders pull back, short-term rates spike, or the NBFC’s own credit quality comes into question — refinancing becomes difficult or very expensive. This is called an Asset Liability Management (ALM) squeeze.
Two large stress episodes in Indian financial history illustrate this dynamic:
- IL&FS (2018): A large infrastructure NBFC with significant short-term commercial paper began defaulting when its lenders refused to roll over paper, even though its long-term infrastructure assets had value in principle. The mismatch between short-term liabilities and long-duration, illiquid assets crystallised the crisis.
- DHFL (2019): A housing finance company with a growing borrowing programme found its market access cut off following governance concerns. The resulting liquidity crisis meant it could not service short-term obligations even as long-term receivables continued to come in.
Both cases were resolved through regulatory and legal processes over several years. The key lesson is not that NBFCs are dangerous — most have run for decades without incident. The lesson is that ALM risk is real and worth checking before you commit capital.
What to look for: The offer document or annual report should include an ALM disclosure table showing the maturity profile of assets and liabilities across time buckets. A significant gap in the 0–1 year bucket (more liabilities maturing than assets) is worth flagging.
Five questions before buying any NBFC NCD
| # | Question | Where to find the answer |
|---|---|---|
| 1 | What is the leverage ratio, and has it been stable or rising over the past 3 years? | Annual report / offer document financial summary |
| 2 | What is the Gross NPA trend? Is asset quality improving or deteriorating? | Annual report / NBFC’s quarterly investor presentation |
| 3 | Has the credit rating been stable (multiple reaffirmations) or has there been recent downgrade/watch action? | RetailBonds.in ratings page / agency website |
| 4 | Who is the promoter, and have there been any regulatory actions (RBI penalty, SEBI enforcement, management changes)? | RBI enforcement actions list / SEBI orders / BSE filings |
| 5 | How diversified is the borrowing programme? Is the NBFC overly dependent on CP or a few lenders? | Borrowing mix table in annual report or offer document |
Where to find NBFC financial data
- Offer document: The most complete source for a specific bond issuance. Contains 3 years of audited financials and detailed risk disclosures. Available on BSE/NSE filings and SEBI EDGAR.
- Annual reports: Published on the issuer’s website and BSE/NSE filings. Contains complete financials, management commentary, and ALM disclosures.
- RBI disclosures: Systemically important NBFCs file quarterly returns with RBI. Summary data is sometimes published in RBI’s Financial Stability Report.
- Rating reports: CRISIL, ICRA, CARE, and India Ratings publish rationale documents for every rating action. These contain the agency’s financial analysis and key risk factors. Access them for free on the agency websites.
- RetailBonds.in screener and ratings page: Use the screener to filter issuers by credit rating and instrument type. Use the ratings page to track recent rating actions on specific issuers.
Putting it together: a brief illustration
Imagine you are evaluating an NBFC NCD offering 10.5% interest, rated A+ by CRISIL. Here is the quick-check process:
- Open the rating rationale on CRISIL’s website. Note: last reviewed 4 months ago, rating stable, outlook stable.
- Open the offer document. Leverage: 6.2x (3 years ago: 5.8x — modest increase). Gross NPA: 2.1% (3 years ago: 1.9% — slight increase, not alarming). CAR: 18.2%.
- Check the risk factors section. No ongoing regulatory actions mentioned. Concentration risk: top 10 borrowers = 18% of book (manageable).
- Check borrowing mix: 35% bank loans, 40% NCDs, 20% commercial paper, 5% external commercial borrowings. No single lender above 15%.
- Check the security: floating charge on receivables, cover ratio 1.1x, trustee is IDBI Trusteeship.
None of this guarantees the bond will perform — an unexpected macro shock, a sector-specific regulatory change, or management issues could change the picture. But working through these five checkpoints systematically means you are making an informed decision, not just chasing the yield number.
Related: NCD prospectus red flags: a checklist · How to read a bond offer document · Secured vs unsecured NCDs · Reading a CRISIL rating action · Browse bonds on the screener →