Before investing in an Indian non-banking financial company (NBFC), first identify what you are buying: listed shares, a bond or non-convertible debenture (NCD), another security, or a public deposit. Each gives you a different claim on the company. Then assess its lending business, loan quality, funding and liquidity, capital, governance, rating history and price. No single ratio or credit rating can establish that an NBFC is safe or that its investment is suitable for you.
Start by identifying the investment
Shares expose you to the company’s business performance and share-price movements. A bond or NCD is a credit claim with terms that depend on the instrument. A public deposit is a separate product with specific regulatory conditions and protections. Do not assume that a warning about one type of investment automatically applies to all the others.
If you are considering a public deposit, see the dedicated checks below: the Reserve Bank of India (RBI) says NBFC public deposits are unsecured, do not have deposit insurance and are not guaranteed by RBI.
How to assess an NBFC, step by step
1. Understand its lending model
Find out what the NBFC lends for or against, who its borrowers are, how it earns income and which economic conditions could weaken customers’ ability to repay. A lender focused on one borrower group, product or geography may face risks that a more diversified lender does not. Compare it with companies that have genuinely similar customers, products, funding models and regulatory treatment, rather than treating all NBFCs as interchangeable.
2. Read at least two years of financial statements
SEBI’s general due-diligence checklist recommends reviewing at least the past two years of the company’s cash flow statement, income statement and balance sheet. Read them together: reported earnings do not by themselves show whether cash is coming in, how borrowings and other liabilities are changing, or whether provisions are keeping pace with credit risk. Look for trends and explanations in the annual report and company disclosures, not just one year’s headline result. SEBI’s due-diligence guidance provides the general checklist.
3. Examine loan quality and provisioning
Track gross and net non-performing asset (NPA) trends, new slippages, write-offs, restructurings where disclosed, collections and provisions. A low reported NPA figure is not enough if loans are being written off rapidly or provisions appear inadequate. RBI explains that income recognition, asset classification and provisioning rules are important to a fair picture of financial health; weak provisioning can leave deteriorating assets or unprovided NPAs obscured in reported figures. Consult the company’s accounting disclosures alongside the applicable RBI guidance on income recognition, asset classification and provisioning norms.
4. Test funding and liquidity
Review the asset-liability profile, funding mix, borrowing costs, maturity concentrations and liquidity disclosures. Ask whether expected loan collections and other cash inflows are likely to arrive in time to meet repayments and operating needs. Also look for off-balance-sheet exposures and securitisation or assignment transactions, which can affect how the business is funded and where risks sit. RBI’s disclosure requirements identify these as relevant areas to examine; the RBI disclosure directions describe them.
5. Check capital, regulatory layer and activity-specific rules
RBI’s Scale Based Regulation framework places NBFCs in different layers, with requirements that vary by layer and activity. Verify the company’s current regulatory classification and the rules that apply to its business using current RBI directions and issuer disclosures. The RBI direction page reviewed identifies directions issued on October 19, 2023, and an update through October 10, 2024; that date does not establish whether a later consolidated update now applies. Do not rely on an old threshold or assume a company’s layer without checking. See RBI’s Scale Based Regulation directions.
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6. Follow the rating and its changes
For each rated instrument, note the rating agency, rating date, outlook or watch status, and any upgrades or downgrades. Read the agency’s rationale and compare it with the latest audited accounts and funding disclosures. RBI disclosure requirements include ratings and migration history. A rating is an opinion about credit risk, not a guarantee of repayment or investment performance; a rating can change. RBI’s disclosure directions identify rating information as a relevant disclosure.
7. Review governance and regulatory signals
Read auditor qualifications, related-party transactions, regulatory penalties and disclosed inspection-related findings. Check group exposures, parent-product financing, and changes in the board or senior management. These signals need context: a disclosed issue is a reason to understand its nature, scale and response, not by itself a complete investment verdict. RBI’s disclosure requirements cover penalties, related-party transactions, parent-product financing and certain concentration or exposure items. The RBI disclosure directions set out relevant disclosure categories.
8. Compare like with like and assess valuation
Compare NBFCs with similar products, borrower profiles, geographies and funding models. Useful comparison dimensions include asset quality and provisioning, capital, funding diversity and cost, liquidity and maturity matching, profitability, governance, rating trajectory and regulatory treatment. SEBI’s general checklist also points investors to competitors, price and volume history, corporate announcements, P/E where meaningful, and intrinsic value. For a lender, a single valuation ratio cannot capture loan losses, sustainable profitability and capital needs; consider those together with the price you would pay.
9. Make the decision conditional on price and downside
A sound business can still be a poor investment if its price is excessive. Likewise, a high yield may reflect investors’ perception of higher credit risk rather than a bargain. Consider what could go wrong for the specific security or deposit, how that downside fits your circumstances, and whether the expected return compensates for it. Neither a rating nor a headline interest rate is a safety conclusion.
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If you mean an NBFC public deposit
Check that the NBFC is registered with RBI and is specifically authorized to accept public deposits. RBI’s FAQ states that these deposits are unsecured, are not covered by deposit insurance and are not guaranteed by RBI. A deposit rating is not deposit insurance or a sovereign guarantee. The FAQ warns: “It should be noted that higher the interest, the higher is the risk.” Because the FAQ contains historical material, check current RBI directions for present rules and any applicable ceilings rather than relying on old rates or limits. Read RBI’s NBFC FAQ and deposit guidance.
What to compare in an NBFC annual report
- Business: borrower and product mix, geography, and the factors that drive repayment.
- Credit quality: gross and net NPAs, slippages, write-offs, collections and provisioning.
- Funding: borrowing sources and costs, asset-liability profile, maturity concentrations, liquidity and off-balance-sheet activity.
- Financial strength: cash generation, earnings, liabilities, capital and the sustainability of profitability.
- Oversight and risk signals: auditor qualifications, related-party transactions, penalties, group exposures and rating migration.
Use the annual report as a starting point, then check current company filings, rating rationales, regulatory disclosures and market-price information. The checklist helps organize due diligence; it cannot determine whether a particular NBFC is safe, attractively valued or suitable for your goals.
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