Vinu: Hey Manu, I've been reading the annual report of an NBFC, and they keep mentioning AUM. What exactly is AUM, and how is it calculated for NBFCs?

Manu: Good question, Vinu! AUM, or Assets Under Management, refers to the total value of financial assets that the NBFC manages. In the case of NBFCs, it mainly includes the loans they give to customers and other financial products they manage.

Vinu: So, does that mean it’s just the loans on their balance sheet?

Manu: Not exactly. It includes both on-balance sheet and off-balance sheet assets. On-balance sheet assets are the loans directly disbursed by the NBFC that show up on their balance sheet. Off-balance sheet assets, on the other hand, include loans that the NBFC has sold or assigned to other financial institutions but still manages.

Vinu: Oh, so AUM includes loans that they no longer own but still manage?

Manu: Exactly! For example, if an NBFC lends ₹100 crore, but later assigns ₹40 crore worth of loans to another bank through securitization, those ₹40 crore loans will still be counted in their AUM, even though they’re off their balance sheet.

Vinu: Got it! How do they calculate AUM then?

Manu: Simple. AUM is the sum of the on-balance sheet loan portfolio and the off-balance sheet loan portfolio. So, if the NBFC has ₹60 crore of loans on its balance sheet and manages ₹40 crore of loans off its balance sheet, the total AUM would be ₹100 crore.

Vinu: That makes sense. But how can I verify what's mentioned in the annual report?

Manu: Great question! Here’s how you can verify the AUM:

Check the balance sheet for the total loan assets under the asset section. That gives you the on-balance sheet part of AUM.

Then, go through the notes to financial statements. You’ll usually find details of securitized or assigned loans there, which are off-balance sheet but still managed by the NBFC. These are part of AUM too.

Vinu: Okay, so the notes will have those off-balance sheet loans?

Manu: Yes, exactly. Also, look at the Management Discussion and Analysis (MD&A) section in the annual report. They often break down the total AUM here, explaining both on and off-balance sheet portions.

Vinu: That sounds helpful! But how do I know the numbers are accurate?

Manu: The auditor’s report will give you confidence. The auditor reviews the financials, so check if they mention anything about the loan assets or AUM. You can also compare AUM figures from previous years in the Directors' Report to spot any trends.

Vinu: Ah, I’ll definitely do that. Is there anything else I should look for?

Manu: Yes, look out for any mention of securitization or loan assignments. These will tell you how much of the loans have been sold but are still managed by the NBFC, contributing to AUM. Sometimes they provide extra details in footnotes or disclosures, so check those too.

Vinu: Thanks, Manu! Now I understand how AUM is calculated and how to verify it. I’ll go through the report with this in mind.

Manu: You’re welcome, Vinu! Once you get the hang of it, analyzing NBFC reports becomes much easier.