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Clear out junk files and repair common Windows errorsFree Scan →Scan for outdated or missing drivers - takes under a minuteDriver Scan →Repair Windows errors before they cause bigger problemsFix Now →Before investing in a non-banking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. These are different claims on the company and do not carry the same protections. Then assess the NBFC’s lending business, loan-book quality, funding and liquidity, capital, governance, rating history and price. No single ratio or credit rating can establish that an investment is safe.
This is an India-specific due-diligence guide, not an assessment of any particular NBFC or a recommendation to invest.
Start by identifying the investment
An NBFC can raise money in different ways, and the risks depend partly on your position as an investor or depositor. A shareholder owns equity and is exposed to the company’s results and share-price movements. A bond or NCD investor lends to the issuer on the instrument’s terms and faces the risk that interest or principal will not be paid as agreed. A public depositor places money under a deposit contract; the protections and rules for that product are not interchangeable with those for shares or securities.
In particular, the Reserve Bank of India (RBI) warns that NBFC public deposits are unsecured, are not covered by deposit insurance and are not guaranteed by RBI. That warning concerns public deposits; it should not be generalized to every NBFC share or bond. For a deposit, verify both that the institution is registered with RBI and that it is specifically authorized to accept deposits. See the RBI’s NBFC FAQ, and check current RBI directions rather than relying on historical rates or ceilings on an FAQ page.
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How to assess an NBFC, step by step
1. Understand the lending model
Work out what the NBFC lends against or to, who its customers are, how it earns revenue, and which economic conditions could affect borrowers’ ability to repay. A lender focused on one customer group, product or geography may face different risks from a diversified lender. Compare it with competitors that have genuinely similar customers, products and funding models—not simply with any company labelled an NBFC. SEBI’s due-diligence guidance recommends understanding the business model and comparing the company with competitors.
2. Read at least two years of financial statements
Review the cash flow statement, income statement and balance sheet for at least the past two years, as SEBI recommends. Look for trends rather than relying on one reporting period. Compare reported earnings with cash generation, and track changes in borrowings, other liabilities, provisions and reported asset quality. Profits that do not translate into cash or that coincide with rising borrowing and weakening loan performance deserve closer examination.
3. Examine loan-book quality and provisions
Track gross and net non-performing assets (NPAs), new slippages, write-offs, restructurings where disclosed, collections and the level of provisions. Consider whether provisions appear adequate for the risks in the loan book, not just whether profits are rising. RBI explains that income recognition, asset classification and provisioning affect the fair picture of financial health: weak provisioning can leave NPAs unprovided for or obscure declining investment values. Its NBFC FAQ on income recognition, asset classification and provisioning describes why these rules matter.
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4. Check funding and liquidity
Read the asset-liability profile, funding mix, maturity concentrations, borrowing costs and liquidity disclosures. Compare when the NBFC must repay its own funding with when it expects to collect loans and receive other cash inflows. A lender can report earnings and still face pressure if cash arrives later than its obligations fall due. RBI disclosure requirements identify asset-liability profiles, off-balance-sheet exposures and securitisation or assignment transactions as relevant information; use the issuer’s disclosures to understand these risks rather than judging liquidity from earnings alone. See the RBI disclosure requirements.
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RBI’s Scale Based Regulation framework places NBFCs in different layers, with requirements that vary by layer and activity. Do not assume that two NBFCs face identical requirements, or state a current regulatory threshold without verifying the applicable rule and the issuer’s classification. The RBI direction page identifies the directions issued on October 19, 2023, and an update through October 10, 2024. Check the latest consolidated RBI Scale Based Regulation directions and the issuer’s disclosures for current requirements and its regulatory layer.
6. Review ratings and their history
For each rated instrument, note the rating agency, instrument, rating date, outlook or watch status, and any upgrade or downgrade. Ratings are opinions about credit risk, not guarantees of repayment. Compare the latest rating rationale with the company’s most recent audited accounts, funding position and liquidity disclosures. RBI disclosure requirements include ratings and their migration, so look beyond the headline rating to see how it has changed over time. The RBI disclosure requirements describe relevant NBFC disclosures.
7. Look for governance and regulatory warning signs
Read auditor qualifications, related-party transactions, disclosed regulatory penalties, inspection-related findings where available, group exposures, parent-product financing, and board or senior-management changes. Consider whether related-party activity or concentration could expose the NBFC to risks that are not obvious from headline loan growth. RBI’s disclosure requirements cover penalties, related-party transactions, parent-product financing and certain concentration or exposure items; consult the issuer’s disclosures and the RBI disclosure requirements.
8. Compare like with like, then judge valuation
When comparing NBFCs, use peers with similar products, customers, geographies, funding models and regulatory treatment. Compare asset quality and provisioning, capital, funding diversification and cost, liquidity and maturity matching, profitability, governance, rating trajectory and valuation. SEBI also recommends considering price and volume history, corporate announcements, price-to-earnings (P/E) ratios where meaningful, and intrinsic value in its due-diligence guidance.
A single valuation ratio cannot capture a lender’s credit quality, sustainable profitability and capital position. A strong business may still be a poor investment at an excessive price, while an apparently cheap valuation may reflect genuine deterioration or uncertainty. Treat valuation as one part of the assessment, alongside the NBFC’s underlying risks.
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9. Make the decision conditional on the downside
Ask what could go wrong for the specific instrument you are considering: weaker borrower repayments, delayed collections, higher funding costs, a maturity mismatch, falling collateral values, or governance and regulatory problems. Then consider whether the potential return is worth those risks at the price or interest rate offered. A high yield is not proof of safety; it may signal that investors perceive greater credit risk.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Is an NBFC deposit safe?
RBI says NBFC public deposits are unsecured, do not have deposit insurance and are not guaranteed by RBI. Registration alone is not enough: check that the NBFC is specifically authorized to accept public deposits, and verify current rules before placing money. A deposit rating does not turn the deposit into an insured or sovereign-guaranteed claim.
RBI’s NBFC FAQ states: “It should be noted that higher the interest, the higher is the risk.” The FAQ contains historical material, so use current RBI directions to check applicable rules and ceilings rather than relying on older figures. The relevant source is the Reserve Bank of India’s NBFC FAQ.
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What to look for in an NBFC annual report
- Financial trend: At least two years of cash flow, income statement and balance sheet information.
- Credit performance: NPA trends, slippages, write-offs, collections and provisioning.
- Funding risk: Asset-liability profile, maturity concentrations, liquidity, off-balance-sheet exposures and securitisation or assignment activity.
- External credit view: Rating rationale, instrument rated, outlook or watch status, and rating changes.
- Governance and exposure: Auditor qualifications, related-party transactions, penalties, group or concentration exposures, and parent-product financing where disclosed.
These items are not a substitute for reading the full accounts or current issuer announcements. Follow up on material changes and compare disclosures across reporting periods.
How to compare NBFCs without relying on one metric
Build a comparison around companies with similar lending activities. Differences in customer base, loan product, geography, funding structure or regulatory treatment can make a simple ranking misleading. Compare the same dimensions across peers: loan-book quality and provisioning, capital, funding cost and diversification, liquidity and maturity matching, profitability, governance, rating changes and valuation. Use a ratio such as P/E only where it helps answer a specific question; it cannot replace analysis of asset quality, capital and earnings sustainability.
The SEBI due-diligence checklist supports comparing business models and competitors, while RBI disclosure requirements identify NBFC-specific exposures and disclosures in the relevant directions.
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