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When you buy an NBFC bond, you’re lending money to a non-banking financial company in exchange for timely interest payments and principal repayment at maturity. But how will you know if the company will make payments on time or even repay the principal? That’s where NBFC bond creditworthiness comes in.
The creditworthiness of an NBFC simply tells you about the issuer’s ability to make timely payments. High creditworthiness means lower default risk, while low creditworthiness may mean greater possibility of missed payments and defaults. Understanding this is key to evaluating NBFC bond risks.
In this guide, we offer a practical framework you may use to conduct a credit analysis for NBFC bonds before investing.
Steps to Evaluate Creditworthiness of NBFC Bonds
Step 1: Start With Credit Ratings
Credit ratings are a quick, standardised signal of NBFC bond credit worthiness. They summarise the issuer’s ability to meet interest and principal obligations, based on the rating agency’s view of business, financials, and risk controls.
When evaluating NBFC bond risks, credit ratings from agencies like CRISIL, ICRA, and CARE are essential. Here’s what they indicate:
| Credit Rating | Credit Risk Level | What It Indicates |
| AAA | Lowest risk | Highest degree of safety; very strong ability to meet obligations |
| AA+, AA, AA- | Very low risk | High degree of safety; strong capacity to repay |
| A+, A, A- | Low risk | Adequate safety; stable but more sensitive to economic changes |
| BBB+, BBB, BBB- | Moderate risk | Moderate degree of safety; acceptable repayment capacity |
| BB | Moderate–high risk | Increased risk of default under stress |
| B+, B, B- | High risk | High likelihood of default |
| C | Very high risk | Very weak repayment capacity |
| D | Default | In default or expected to default |
Also, you should note that the issuer’s credit rating may change during the course of the bond’s tenure. Ratings agencies review ratings periodically and may downgrade them if the financials look weak. This could be an important factor in credit analysis of NBFC bonds.
Step 2: Understand Asset Quality and the Loan Book
An NBFC can repay its bonds only if its borrowers repay their loans. That’s why asset quality is one of the most important parts of evaluating NBFC bond risk.
In simple terms, asset quality tells you how healthy the NBFC’s loan book is.
What to look for:
- Bad loans (NPAs): Higher bad loans mean borrowers are struggling to repay
- Recovery strength: Strong collections reduce stress during slowdowns
- Loan mix: Heavy exposure to risky segments like unsecured loans or real estate can increase volatility
- Customer quality: Lending to lower-rated borrowers increases risk
Where can you check this?
You can find asset quality details in:
- Annual reports
- Investor presentations
- Credit rating reports by CRISIL, ICRA, or CARE
This forms the base of credit analysis for NBFC bonds.
Step 3: Check Capital Strength (Ability to Absorb Losses)
Capital is like a safety buffer. If some loans go bad, capital helps the NBFC absorb losses without missing bond payments. So checking this helps you conduct a thorough credit analysis for NBFC bonds.
What to check:
- Capital Adequacy (CRAR): Higher capital means better protection
- Equity vs borrowing: Too much borrowing increases pressure
- Growth vs capital: Fast growth without capital support raises risk
Where can you find this?
- Balance sheet in annual reports
- Credit rating rationale documents
Step 4: Review Profitability and Earnings Stability
Profitability shows whether an NBFC earns enough to comfortably pay interest on its bonds. Stable profits reduce NBFC bond risks over time.
You can check if the NBFC has:
- Consistent profits over multiple years
- Healthy margins (not shrinking sharply)
- Controlled costs
- Manageable credit losses
You don’t need complex ratios. Just check whether profits:
- Are steady across economic cycles
- Don’t swing wildly year to year
Where to check?
- Profit & Loss statement in annual reports
- Rating agency summaries
For NBFC bond credit worthiness, consistency matters more than high one-time profits.
Step 5: Look at Liquidity and Funding Sources
Even profitable NBFCs can struggle if they can’t access cash when needed. Liquidity plays a major role in evaluating NBFC bond risk.
What to understand:
- Does the NBFC rely heavily on short-term borrowing?
- Does it have multiple funding sources (banks, bonds, securitisation)?
- Does it maintain cash buffers?
Why this matters: If funding dries up suddenly, bond repayments can come under pressure.
Where to find this?
- Notes to accounts in annual reports
- Rating agency liquidity commentary
Step 6: Evaluate Business Model and Industry Risk
Not all NBFCs operate in the same environment. Some industries are more stable than others, which affects NBFC bond credit worthiness.
For instance, an NBFC in a high-growth housing segment may be more stable than one exposed to stressed infrastructure projects. This will impact how profitable the NBFC is today and what may be it’s growth prospects (and repayment ability) in the future.
That’s why this context is critical in credit analysis for NBFC bonds. Here’s what you may need to assess:
- Industry cycle: Is the sector growing or slowing?
- Market demand: Are loans still in demand?
- Competition: Too much competition can reduce margins
- Sector exposure: Infrastructure, real estate, or MSME lending can be cyclical
Step 7: Review Management Quality and Governance
Good management often makes the biggest difference during stress. This is why governance is part of NBFC bond rating criteria as well.
You can check these things:
- Is the senior management strong and competent?
- Does the management have a history of handling downturns?
- Are there frequent regulatory issues?
- Are disclosures transparent?
You don’t need personal access to management. Rating reports and annual reports usually highlight governance strengths or concerns.
Step 8: Consider Economic and Regulatory Environment
NBFCs operate under RBI regulation and are affected by the broader economy. Even strong NBFCs can face short-term stress if conditions tighten.
This means that the creditworthiness of NBFC bonds may change if some regulatory changes are introduced. These regulatory and environmental factors include:
- Interest rate movements
- RBI’s revision of NBFC regulations
- Economic slowdowns affecting borrowers
- Sector-specific stress
This helps you put NBFC bond credit worthiness in context of the broader economy, rather than looking at numbers alone.
Implementing A Practical Framework for NBFC Bond Credit Worthiness
To evaluate NBFC bond credit worthiness, start with:
- Ratings check
- Review asset quality
- Check capital buffers
- Assess profitability and business model
- Consider liquidity provisions
This structured approach makes evaluating NBFC bond risk more consistent and helps you complete a practical credit analysis for NBFC bonds.
If you wish to make the investment process smoother, you can check AAA and AA-rated NBFC bonds on GoldenPi. These bonds carry the some of the highest credit ratings, meaning top-most level of capital safety.
FAQs on Creditworthiness of NBFC Bonds
How to evaluate NBFC bond risks?
Assessing the credit rating of the NBFC (and correspondingly the bond) is the first step. NBFCs with AAA and AA ratings offer the highest level of security, while BBB and lower may have a higher default risk.
Other than that, you can also asset the asset quality, loan book, capital reserve and liquidity, and business model of the NBFC to understand it’s long-term outlook.
Does NBFC bond creditworthiness impact bond prices?
Yes. Lower NBFC bond creditworthiness means that there is a greater chance of default. This tends to push such bond prices lower in the secondary market. Issuers also have to offer higher yields to attract investors.
Conversely, higher NBFC bond creditworthiness may help increase the price of the bond in the secondary market because more people will be willing to buy it. But this may also mean lower yield rates.
What is the NBFC bond rating criteria?
NBFC bond rating criteria (criteria for rating the NBFC) varies depending on the rating agency in question. For instance, ICRA uses the following as NBFC bond rating criteria:
- Operating and business risk
- Financial risk (asset quality, profitability, and capitalisation)
- Liquidity
Disclaimer:
This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.
Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.
