A practical guide to financing NBFCs in India, explained through conversations between Manu and Vinu. Explore credit appraisal, financial analysis, portfolio quality, liquidity, loan structuring and monitoring—with case studies that sharpen a banker’s judgment.

Index

Part I — Understanding the Borrower Before Discussing the Loan

Chapter 1 — “Manu, Why Does an NBFC Need Money from a Bank?”

1.1 How an NBFC’s lending business works
1.2 Why banks lend to institutions that themselves lend
1.3 The journey of bank funds to the ultimate borrower
1.4 Where the NBFC earns its margin
1.5 The bank’s two levels of risk: the NBFC and its underlying portfolio

Chapter 2 — “Is an NBFC Just a Smaller Bank?”

2.1 Differences between banks and NBFCs
2.2 Lending, deposit-taking and payment functions
2.3 Why all NBFCs cannot accept public deposits
2.4 What RBI registration establishes—and what it does not
2.5 Why a bank cannot appraise an NBFC like a trading concern

Chapter 3 — “Which Kind of NBFC Are We Looking At?”

3.1 Investment and Credit Companies
3.2 Microfinance Institutions and Housing Finance Companies
3.3 Infrastructure Finance Companies and Infrastructure Debt Funds
3.4 Factors and other specialised categories
3.5 Why P2P platforms, Account Aggregators and Core Investment Companies require separate treatment

Chapter 4 — “Does the Size of the NBFC Change the Rules?”

4.1 Understanding scale-based regulation
4.2 Base, Middle, Upper and Top Layers
4.3 Activity-based requirements versus layer-based requirements
4.4 Changes in classification and their implications
4.5 Preparing a regulatory applicability sheet before appraisal

Chapter 5 — “Who Is Actually Borrowing from Us?”

5.1 Legal identity, ownership and beneficial ownership
5.2 Promoters, subsidiaries and group structure
5.3 Standalone financial strength versus group reputation
5.4 Explicit support versus assumed promoter support
5.5 Mini-case: A famous group name conceals a weak borrowing entity

Part II — What Can the Bank Finance?

Chapter 6 — “Can We Finance Every RBI-Registered NBFC?”

6.1 Registration, exemptions and verification
6.2 Checking the permitted business activities
6.3 Regulatory restrictions and supervisory actions
6.4 Eligibility under the bank’s lending policy
6.5 Why eligibility does not establish creditworthiness

Chapter 7 — “What Exactly Will Our Money Be Used For?”

7.1 Permitted lending and asset-financing activities
7.2 Fresh originations versus refinancing existing liabilities
7.3 Funding second-hand assets and specialised portfolios
7.4 Distinguishing genuine financing needs from liquidity rescue
7.5 Establishing a traceable and permissible end use

Chapter 8 — “Which Proposals Must We Refuse?”

8.1 Activities ineligible for bank finance under applicable directions
8.2 Bridge finance and interim funding restrictions
8.3 Capital-market-related financing restrictions and exceptions
8.4 Restrictions involving shares, debentures and collateral
8.5 Mini-case: A prohibited transaction presented under a different facility name

Chapter 9 — “How Much Exposure Can Our Bank Take?”

9.1 Single-counterparty and connected-counterparty exposure
9.2 Applicable NBFC-specific exposure restrictions
9.3 Fund-based, non-fund-based and investment exposures
9.4 Risk weights, external ratings and capital consumption
9.5 Regulatory ceilings versus the bank’s internal limits

Chapter 10 — “Does On-Lending Automatically Qualify as Priority Sector Lending?”

10.1 Direct lending versus lending through an NBFC
10.2 Eligible institutions, purposes and ultimate borrowers
10.3 Applicable limits, exclusions and conditions
10.4 End-use evidence and reporting requirements
10.5 Mini-case: A facility is commercially sound but ineligible for the proposed PSL classification

Part III — Understanding the NBFC’s Business

Chapter 11 — “Who Does This NBFC Lend To?”

11.1 Customer segments and borrower profiles
11.2 Secured versus unsecured lending
11.3 Loan size, tenure, geography and product mix
11.4 New-to-credit and informal-income borrowers
11.5 Whether the NBFC has a sustainable competitive advantage

Chapter 12 — “How Does It Find and Approve Borrowers?”

12.1 Branches, agents, dealers and digital channels
12.2 Credit policy and underwriting authority
12.3 Income assessment and repayment-capacity analysis
12.4 Bureau checks, fraud checks and policy deviations
12.5 Mini-case: Rapid growth achieved by relaxing credit standards

Chapter 13 — “Who Collects the Instalments?”

13.1 Collection organisation and collection channels
13.2 Cash collections, digital collections and reconciliation
13.3 Recovery agents and borrower treatment
13.4 Incentives that encourage misleading collection reporting
13.5 Business continuity when a collection partner fails

Chapter 14 — “Can We Trust the People Running It?”

14.1 Promoter experience and track record
14.2 Board oversight and management capability
14.3 Independence of risk, compliance and internal audit
14.4 Related-party transactions and conflicts of interest
14.5 Succession planning and dependence on key individuals

Chapter 15 — “What Should We Look for During a Visit?”

15.1 Planning head-office and branch visits
15.2 Following a loan from application to closure
15.3 Sampling borrower files and security documents
15.4 Verifying collection practices and management information
15.5 Mini-case: The branch visit contradicts the appraisal presentation

Part IV — Reading an NBFC’s Financial Statements

Chapter 16 — “Why Does This Balance Sheet Look Different?”

16.1 Loans, investments, cash and other assets
16.2 Bank borrowings, debt securities and other funding
16.3 Net worth, intangible assets and regulatory deductions
16.4 On-book assets versus Assets Under Management
16.5 Standalone and consolidated accounts

Chapter 17 — “Is the Reported Profit Coming from Lending?”

17.1 Interest income and finance costs
17.2 Net interest income and lending spreads
17.3 Processing fees and other income
17.4 Assignment, securitisation and other transaction-related income
17.5 Mini-case: Profit rises while the recurring lending margin falls

Chapter 18 — “Where Has the Profit Gone?”

18.1 Operating expenses and cost efficiency
18.2 Credit costs, provisions and write-offs
18.3 Yield, cost of funds and profitability
18.4 Return on assets and return on equity
18.5 Building a bridge from reported profit to sustainable earnings

Chapter 19 — “Which Ratios Should We Actually Use?”

19.1 Capital adequacy and leverage
19.2 Asset-quality and provision-coverage measures
19.3 Profitability and operating-efficiency measures
19.4 Liquidity and funding-concentration measures
19.5 Why current ratio and conventional DSCR require careful interpretation

Chapter 20 — “Do Accounting Numbers and RBI Numbers Always Match?”

20.1 Applicable accounting framework and Ind AS
20.2 Expected Credit Loss and regulatory provisioning
20.3 Stage 1, Stage 2 and Stage 3 classifications
20.4 Regulatory asset classification versus accounting impairment
20.5 Mini-case: Low reported NPAs but a rising Stage 2 portfolio

Part V — Testing the Quality of the Loan Book

Chapter 21 — “What Is Hidden Behind the NPA Percentage?”

21.1 Gross NPAs, net NPAs and overdue accounts
21.2 Days Past Due and delinquency buckets
21.3 Restructured accounts and repayment modifications
21.4 Write-offs, settlements and recoveries
21.5 Why a stable NPA ratio can conceal deterioration

Chapter 22 — “How Do We Read Portfolio Behaviour?”

22.1 Collection efficiency and its different definitions
22.2 Bounce rates and first-payment defaults
22.3 Roll rates, cure rates and repeat delinquency
22.4 Vintage and cohort analysis
22.5 Mini-case: New disbursements dilute the headline delinquency ratio

Chapter 23 — “Is the Loan Book Too Concentrated?”

23.1 Borrower and borrower-group concentration
23.2 Geographic and industry concentration
23.3 Product, dealer and sourcing-channel concentration
23.4 Employer, platform and ecosystem dependence
23.5 Correlated defaults during a common shock

Chapter 24 — “How Do We Know These Loans Are Real?”

24.1 Loan-level data tapes and reconciliation
24.2 Sample borrower verification and disbursement checks
24.3 Duplicate borrowers, duplicate assets and duplicate financing
24.4 Fictitious loans, evergreening and collection manipulation
24.5 Mini-case: A performing portfolio supported by circular fund movements

Chapter 25 — “What Happens When Borrowers Stop Paying?”

25.1 Security quality and enforceability
25.2 Repossession, litigation and recovery timelines
25.3 Recovery expenses and collateral realisation
25.4 Loss Given Default versus collateral value
25.5 Testing historical recoveries against management claims

Part VI — Capital, Liquidity and Repayment Capacity

Chapter 26 — “How Much Capital Is Enough?”

26.1 Net Owned Fund and regulatory capital concepts
26.2 Capital requirements by category and layer
26.3 Tangible equity and quality of capital
26.4 Growth, credit losses and capital consumption
26.5 Mini-case: Reported capital adequacy is comfortable, but the loss cushion is thin

Chapter 27 — “Can a Profitable NBFC Still Default?”

27.1 Profitability versus liquidity
27.2 Asset-liability maturity mismatches
27.3 Contractual cash flows versus behavioural assumptions
27.4 Liquidity buffers and applicable liquidity requirements
27.5 The danger of refinancing dependence

Chapter 28 — “Who Else Is Funding This NBFC?”

28.1 Banks, financial institutions and refinance providers
28.2 Debt securities, commercial paper and deposits where permitted
28.3 Assignment and securitisation as funding sources
28.4 Lender concentration and unutilised facilities
28.5 Mini-case: A highly rated NBFC loses access to fresh funding

Chapter 29 — “What Will Repay Our Loan?”

29.1 Collections from the existing portfolio
29.2 Cash needed for operating expenses and other liabilities
29.3 Fresh disbursement commitments and growth assumptions
29.4 Base-case and stressed cash-flow projections
29.5 Distinguishing committed support from expected fundraising

Chapter 30 — “How Bad Can the Situation Become?”

30.1 Collection slowdown and rising credit losses
30.2 Funding-cost increases and margin compression
30.3 Withdrawal of funding and rating downgrades
30.4 Combined liquidity, capital and asset-quality stress
30.5 Mini-case: Finding the point at which the NBFC can no longer service bank debt

Part VII — Assessing and Structuring the Bank Facility

Chapter 31 — “How Much Finance Does the NBFC Really Need?”

31.1 Understanding the requested facility and its purpose
31.2 Projected disbursements, collections and funding gaps
31.3 Existing borrowings and available lender limits
31.4 Promoter contribution and capital constraints
31.5 Worked case: Assessing a ₹50 crore request from a growing retail NBFC

Chapter 32 — “Should We Give a Term Loan or a Revolving Facility?”

32.1 Matching facility structure to the financing need
32.2 Repayment schedules aligned with portfolio cash flows
32.3 Drawdown conditions and utilisation periods
32.4 Moratoriums, bullet repayments and refinancing risk
32.5 Why a familiar product structure may be unsuitable

Chapter 33 — “What Security Are We Actually Taking?”

33.1 Hypothecation of eligible loan receivables
33.2 Exclusive, first and pari passu charges
33.3 Existing charges, lender consents and security trustees
33.4 Applicable ROC and CERSAI registration requirements
33.5 Mini-case: A receivables pool already supports another lender’s borrowing

Chapter 34 — “How Do We Calculate Drawing Power Against Receivables?”

34.1 Defining eligible and ineligible receivables
34.2 Overdues, related-party loans and other exclusions
34.3 Margins, haircuts and minimum security cover
34.4 Excluding assigned, securitised and otherwise encumbered assets
34.5 Worked case: Calculating availability after exclusions and existing lender claims

Chapter 35 — “Which Conditions Will Actually Protect the Bank?”

35.1 Financial, portfolio-quality and liquidity covenants
35.2 Restrictions on distributions and related-party transfers
35.3 Reporting obligations and verification rights
35.4 Escrow, collection arrangements and cash-flow controls
35.5 Triggers, cure periods and consequences of breach

Chapter 36 — “How Should We Write the Credit Recommendation?”

36.1 Presenting the business and financing requirement
36.2 Explaining financial, portfolio and liquidity findings
36.3 Identifying risks, mitigants and residual risks
36.4 Recommending amount, structure, pricing and conditions
36.5 Case discussion: Approve, reduce, defer or decline?

Part VIII — Different NBFCs, Different Appraisal Questions

Chapter 37 — “Would We Assess Every NBFC the Same Way?”

37.1 Vehicle and equipment financiers
37.2 MSME and Loan Against Property lenders
37.3 Housing Finance Companies
37.4 Infrastructure and project financiers
37.5 Comparing cash flows, collateral and recovery risks

Chapter 38 — “What Changes in Microfinance?”

38.1 Household income and repayment-obligation assessment
38.2 Multiple borrowing and borrower indebtedness
38.3 Geographic concentration and collection disruption
38.4 Conduct, pricing and applicable microfinance requirements
38.5 Case study: Strong historical collections followed by district-level stress

Chapter 39 — “Are Gold Loans Always Safe?”

39.1 Appraisal, purity, custody and insurance
39.2 Applicable lending and collateral requirements
39.3 Price movements, repayment patterns and overdue accounts
39.4 Auctions, operational controls and fraud risks
39.5 Case study: Valuable collateral fails to compensate for weak controls

Chapter 40 — “What Changes with Digital and Specialised Lenders?”

40.1 Digital lenders, Lending Service Providers and outsourced functions
40.2 Unsecured consumer credit and model-driven underwriting
40.3 Factoring: receivable authenticity, recourse and dilution
40.4 Core Investment Companies and group dependence
40.5 Case study: Fast digital growth supported by an untested credit model

Part IX — Bank–NBFC Partnerships Beyond Direct Lending

Chapter 41 — “Is Co-Lending the Same as Lending to an NBFC?”

41.1 Identifying the borrower and the bank’s exposure
41.2 Roles of the originating and partner institutions
41.3 Underwriting, risk sharing and servicing responsibilities
41.4 Collections, information exchange and asset classification
41.5 Case study: Comparing a bank loan to an NBFC with a co-lending arrangement

Chapter 42 — “Should We Buy Its Loans Instead?”

42.1 Direct loan transfers and assignment structures
42.2 Securitisation and investment in securitisation exposures
42.3 Applicable due diligence, retention and holding requirements
42.4 Servicing continuity, documentation and cash-flow waterfalls
42.5 Case study: A good originator offers a weak pool

Chapter 43 — “Does a Guarantee Remove the Risk?”

43.1 Corporate guarantees and enforceability
43.2 Default Loss Guarantees under applicable frameworks
43.3 Credit enhancement versus genuine risk transfer
43.4 Counterparty strength, correlation and wrong-way risk
43.5 Case study: The guarantor needs support at the same time as the borrower

Part X — Monitoring, Stress and Recovery

Chapter 44 — “What Should We Monitor After Disbursement?”

44.1 End-use verification and utilisation checks
44.2 Portfolio, collection and financial reporting
44.3 Security cover and covenant compliance
44.4 Ratings, lender behaviour and regulatory developments
44.5 Building a practical monthly monitoring dashboard

Chapter 45 — “Which Warning Signs Should Make Us Act?”

45.1 Falling collections and increasing overdue migration
45.2 Rapid growth, repeated policy deviations and weak underwriting
45.3 Auditor resignations, qualified reports and management exits
45.4 Funding withdrawals, delayed reporting and regulatory restrictions
45.5 Case study: Individually small warning signs reveal a serious problem

Chapter 46 — “What If the NBFC Misses Our Instalment?”

46.1 The bank’s asset classification versus the NBFC’s portfolio classification
46.2 SMA, NPA and provisioning requirements applicable to the bank
46.3 Viability assessment and corrective action
46.4 Restructuring, additional finance and evergreening concerns
46.5 Coordination among lenders and preservation of security

Chapter 47 — “How Do We Recover from a Financial Institution?”

47.1 Contractual remedies and enforcement of receivables security
47.2 SARFAESI and other recovery routes where applicable
47.3 Why the ordinary corporate insolvency route cannot be assumed for every NBFC
47.4 The notified Financial Service Provider insolvency framework
47.5 Case study: Collections continue, but control over the cash becomes disputed

Part XI — Manu and Vinu Examine Complete Proposals

Chapter 48 — “The Proposal That Deserved Approval”

48.1 A diversified vehicle-finance NBFC seeks expansion funding
48.2 Portfolio quality, capital and liquidity assessment
48.3 Facility sizing and security structure
48.4 Approval conditions and monitoring plan
48.5 Why the remaining risks are acceptable

Chapter 49 — “The Proposal That Needed a Smaller Limit”

49.1 An MSME lender seeks aggressive growth funding
49.2 Concentration, leverage and funding-gap concerns
49.3 Reworking management projections
49.4 Reduced sanction with staged availability
49.5 Why conditions must address the identified weaknesses

Chapter 50 — “The Proposal We Had to Decline”

50.1 An apparently profitable NBFC seeks urgent funding
50.2 Related-party transfers and unexplained cash movements
50.3 Weak receivable verification and refinancing dependence
50.4 Why collateral and promoter assurances are insufficient
50.5 Writing a reasoned decline recommendation

Chapter 51 — “The Borrower That Changed After Sanction”

51.1 A satisfactory account begins showing collection stress
51.2 Early warning signs and management explanations
51.3 Revised liquidity forecasts and covenant breaches
51.4 Choosing among containment, support and exit
51.5 Lessons from the bank’s response

Chapter 52 — “Vinu Presents His First Independent Credit Decision”

52.1 Separating facts, assumptions and unanswered questions
52.2 Connecting business quality with financial performance
52.3 Testing repayment without relying on optimistic fundraising
52.4 Defending the recommendation before the credit committee
52.5 Manu’s final question: “What evidence could change your decision?”