8 Key Metrics for NBFC Investors.

Understand the financial health of Non-Banking Financial Companies

2 min readPublished
An illustration of an Indian three-wheeler delivery vehicle loaded with cardboard boxes, focusing on its sturdy metal suspension and wheels.
What keeps a heavy loader stable?

A delivery vehicle carrying high stacks of boxes depends entirely on its strong suspension springs and wheels.

The story

Bajaj Finance's Assets Under Management crossed ₹3 lakh crore in FY24. But what lies beneath such impressive numbers? Is it a sign of strength or a warning sign?

NBFCs lend money but can't take savings deposits like banks. Their funding source is crucial.

To evaluate NBFCs, we need to look beyond just their lending numbers. Metrics like P/BV, RoE, and RoA reveal how they deploy capital.

GNPA shows the percentage of bad loans. A lower GNPA is safer for investors.

CRAR is the capital cushion that absorbs shocks. A higher CRAR means better protection.

The Cost-to-Income ratio measures operational efficiency. Lower costs save more money.

Funding Mix reveals reliance on cheap or expensive borrowings. ALM checks if short-term borrowing funds long-term loans, a classic collapse trigger.

These 8 key metrics together reveal if an NBFC is financially strong or weak.

Analogy

Leverage amplifies outcomes

Consider two shopkeepers. One borrows heavily to expand, while the other uses his own capital. In good times, the first shopkeeper's profits soar, but in bad times, losses mount. NBFCs are similar; their funding mix and leverage can magnify both gains and losses.

Why this matters

Understanding these 8 key metrics can help you make informed decisions about your investments in NBFCs. By evaluating their financial health, you can avoid potential pitfalls and choose companies with strong fundamentals.

Lock it in

Where people go wrong

  1. Treating NBFCs like banksNBFCs can't accept demand deposits like savings bank accounts.
  2. Ignoring ALM mismatchUsing cheap short-term funding for long-term loans is risky.
  3. Chasing high RoE blindlyHigh RoE might be fueled by excessive leverage, magnifying losses during downturns.
ALM Mismatch.Asset-Liability Management
Borrowing short-term funds (e.g., 3 months) to give long-term loans (e.g., 5 years) is risky. If short-term lenders demand repayment, the NBFC runs out of cash.
If you only remember three things

  1. Check P/BV and RoE for capital efficiency

  2. Monitor GNPA and CRAR for asset quality

  3. Watch Funding Mix and ALM for financial stability

Investors often chase high-yielding NBFCs without understanding the leverage risk that can magnify losses.
Shekar
Ankit
This NBFC is offering 12% return on deposits, way higher than regular banks! I am thinking of putting all my savings here.