Before getting into the main components of NBFC evaluation, here is brief information about NBFC. Registered under the Companies Act, 1956, NBFC Registration is provided to the companies engaged in the business of:
- loans and advances,
- investments in stock/equity/shares/bonds/debentures and other Govt securities,
- chit fund,
- insurance business,
but cannot include in:
- agricultural activity,
- industrial activity,
- purchase/sale of any goods and services (other than securities) and
- sale/purchase/construction of the immovable property.
Key Points to NBFC Evaluation
Non-Banking Financial Company in every country has significantly contributed to the growth of that particular economy. It has been instrumental in ensuring that the finance access across lands, in a huge and diverse country like India. This financial availability is essential to boost growth and entrepreneurship. Hence it has become a very important part of our nation’s Gross Domestic Product. Especially considering its Benefits for Producer Companies.
With a recent sharp fall in prices, buying of an NBFC look attractive once again. And looking at the heavy standards of compliance, by the RBI, many business entities are taking the indirect door to get into the NBFC industry, instead of starting fresh and going through the challenging process to get fresh NBFC License. So they are looking to purchase an existing one, to avoid the higher costs involved in the beginning from a scratch.
But investors need to be extremely cautious and have good clarity on their assets, liquidity, and check NBFC evaluation, before going ahead with the buying process.
It consists of loans and advances (or receivables) and all investments in bonds etc. Analyzing the maturity profile of assets is useful. Large holdings in cash or liquid securities would imply an inability to distribute funds, fast. This is a Growth concern. Another area that may be covered in this is the Concentration risk that needs to be considered – the clients or key sectors where the majority of lending lies. Geographic concentration is also important.
Further, you must look into their classification & conditions of classifying under Doubtful Assets, Loss Assets, Non-Performing Assets (NPA) and Stressed Assets, etc.
The Interest Income. It includes loan processing fees, accounting for a significant portion. For NBFCs, this processing fee income can come around 50% of total revenue. The Non-interest, non-fee income, it doesn’t require additional leverage and improves ROA (Return on Assets) significantly. It is also important to understand the source and composition of fees.
The structure, tenor, and maturity of borrowings must be examined with a keen eye. As relative to the assets created. For example, the longer the liabilities, the better. Check if the NBFC is raising 3-5 month money and deploying 8-10 month loans? This will create liquidity pressures on the NBFC.
An Asset-Liability Mismatch (ALM) means a bad loan problem, eventually.
Meaning loans on book/ loans securitized. This is a key metric that can be captured in presentations by not disclosed on the balance sheet. NBFCs securitize and upsell loans to banks. A higher level of securitizing is considered good, as it means that NBFC can generate liquidity to fund new loans. Disbursal may also include, from where the loan fees are generated. Which, for example in the case of a used car finance, where the loans are cycled rapidly, comprise a large portion of income.
NBFC Evaluation scrutiny must include checking the provisioning policy keenly. as these indicators of financial strength or weakness, can be very deceptive. Varying asset classes need different provisioning standards. These standards may not always be followed by the NBFC in question.
Security covers of loans must also be weighed- for example, a gold loan lender with 5% NPA is comparatively safer than a loan against property as the loan is collateralized with gold, which is a liquid asset under their control, whereas a property is much harder to foreclose and liquidate – so provisions under the former case, can be lesser than the latter.
Cost of funds (COF):
As cash is the raw material for lenders. And as for its borrowing cost, the rates for wholesale borrowing and deposits are, generally, standardized across NBFCs. so a higher than market COF should be checked thoroughly.
The track record of management, investors, and their track record gave regulatory standards. An NBFC that has survived for a longer period and been through a few regulatory changes would be much stronger, for an investor.
The other important parameters to look at, are, loan book growth, disbursement growth, Gross and net NPAs, Capital Adequacy Ratio, etc.
You need to ensure that the NBFC you are planning to buy complies with the regulations. Else, it may result in stringent penalties including cancellation of the NBFC License. Audits for NBFC Evaluation are complex and, although all NBFC auditors are impaneled with RBI.
For more information on NBFC evaluation, buying or registration, you can visit our website Companyregistrationonline.
We offer an extensive range of services for Nidhi Company Registration, Private Limited Company Registration, LLP Registration, One Person Company Registration, or Section 8 Company Registration anywhere in India, so call us at +91 8750008585 or e-mail us at [email protected].
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