How to Analyse NBFC Stocks in India: Complete Guide to AUM, NPAs, RoE & Valuation
Learn how to analyse Indian NBFCs using AUM, RoA, NPAs, SMA, CAR, ALM and P/B valuation. A complete beginner-friendly guide to NBFC risk, lending models & growth
Indian NBFCs can be incredible wealth creators.
But for every future multibagger, there’s a ticking time bomb.
So how do you know which is which?
By understanding one simple truth:
The “Non-Banking” in NBFC explains everything.
NBFCs can lend money, but cannot accept savings/current account deposits.
This single rule determines:
where they get money
how much it costs
what risks they carry
how safe (or unsafe) they really are
Let’s break down the full NBFC playbook step-by-step.
1. How NBFCs Really Make Money (And Where Risk Begins)
NBFCs run a simple model:
Borrow High → Lend Higher.
Profit = Spread.
Since they can’t take cheap deposits, they depend on:
Banks – long-term loans
Capital Markets – bonds & NCDs (non-convertible debentures)
Commercial Papers (CPs) – short-term money
What YOU must check
Cost of Funds
Lower = better.
A rising cost is a massive red flag.
Funding Diversity
Too much dependence on CPs → disaster risk.
Look for a balanced borrowing mix.
A weak funding profile is the earliest sign an NBFC is unsafe.
2: The Dashboard – AUM, RoA, RoE, NIM & Cost-to-Income
Now we check performance.
2.1 The Speedometer → AUM Growth
AUM = total loan book = assets under management
Healthy NBFCs grow >15% annually.
Flat AUM = trouble.
2.2 The Profit Gauges
Net Interest Margin (NIM) – Core profitability
Higher NIM = stronger business.
Return on Assets (RoA) – THE king metric
RoA > 2.5% = excellent
This shows efficiency of every rupee of assets.Profit from every rupee of asset
Cost-to-Income Ratio
Lower = lean & efficient.
Higher = bloated.
Return on Equity (RoE) – Shareholder return
RoE > 15% = strong NBFC
3. The Litmus Test → Loan Book Quality (NPAs, SMA & Collection Efficiency)
Great growth + great profitability = meaningless if the loans are bad.
Here’s how to stress-test the loan book:
3.1 NPAs – The Official Damage Report
Gross NPA — Total bad loans.
Net NPA — Bad loans AFTER provisions.
Net NPA < 1.5% = excellent.
Provision Coverage Ratio (PCR)
Higher PCR = safer.
PCR > 70% is strong.
3.2 Early Warning Indicators (Smoke Before the Fire)
Collection Efficiency
98%+ = strong
A drop = WARNING.
Special Mention Accounts (SMA)
SMA = early stress, before NPAs.
A rising SMA book = incoming explosion.
4. The Safety Buffers → CAR & ALM
Once you know the cracks, check how safe the vehicle is.
Capital Adequacy Ratio (CAR)
Safety cushion of OWN capital.
RBI minimum = 15%
But YOU want:
CAR > 20%
Asset-Liability Mismatch (ALM)
Golden rule: Never fund long-term loans with short-term money.
If an NBFC funds 5-year loans using 3-month CPs →
It can collapse overnight.
5. The Playbooks – What Type of NBFC Are You Analyzing?
Not all NBFCs are the same.
Each category has its own risk trigger.
Vehicle Finance — Risks → economy slowdown.
Gold Loans — Risks → gold price crashes.
Microfinance (MFI) — Risks → politics, loan waivers.
Housing Finance (HFCs) — Risks → rising interest rates.
Consumer Finance — Risks → job losses, weak sentiment.
6. The Driver’s Seat → Management Quality
A great business run by bad management is a bad investment.
Judge them using:
Track Record in Crises
How did they handle 2008 / IL&FS / COVID?
Communication Quality
Transparent vs. overselling.
Governance Red Flags
sudden auditor exits
promoter pledging
bizarre subsidiaries
excessive management compensation
7. Valuation – How to Know If the NBFC Is Cheap or Expensive
Forget P/E
P/E is distorted because NBFC earnings fluctuate with provisions.
Use Price-to-Book (P/B)
P/B shows what you’re paying vs. company’s net worth.
Golden Rule: P/B Must Match RoE
High RoE (>15%) → deserves high P/B
Low RoE (<12%) → should trade near book value
8. The Ultimate NBFC Analysis Checklist
Growth & Profitability
AUM growth > 15%
RoA > 2.5%
RoE > 15%
Asset Quality
Net NPA < 1.5%
Collection Efficiency > 98%
SMA stable or declining
Safety Buffers
CAR > 20%
No ALM mismatch
Management
Clean governance
Transparent communication
Good crisis history
Valuation
P/B justified by RoE
You now have the complete NBFC playbook used by professionals.
