The rating methodology developed by Infomerics for rating of NBFCs fixed deposit program comprises of qualitative and quantitative factors, the details of which are described below.


Qualitative factors

The qualitative factors that are analyzed while arriving at the rating of fixed deposits of NBFCs are given below:


a) Overview and Operating environment

Non-Banking Finance Companies (NBFCs) play an important role in the Indian financial market. While the Reserve Bank of India (RBI) regulates both NBFCs and banks, there are some significant differences in the regulatory perspective, with NBFCs being given greater flexibility in governance structure and operational matters and being allowed to lend independent of priority-sector targets and of various reserve requirements. However, at the same time, there are regulatory restrictions on the bouquet of services that NBFCs can offer and on their funding options. Normally NBFCs lend for vehicle loans, personal loans, loan against property/shares, corporate loan etc. and industrial loans by large NBFCs.

The operating environment has a significant bearing on an NBFC’s credit rating as it can impact its growth prospects and asset quality quite considerably. In assessing the operating environment, also looked at is the overall economic conditions, prospects of the industry related to the asset class being financed, and the regulatory environment. For instance, in the case of a commercial vehicle (CV) financing NBFC, the level of economic activity and freight rates are very important, just as the outlook on real estate is important for a home finance company, from the perspective of both asset creation and asset quality. 

For an NBFC, regulatory changes can significantly impact (either positively or negatively) credit losses. For instance, the establishment of the credit information bureau has helped lenders take informed credit decisions, while The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) has helped them recover real estate backed loans more efficiently; at the same time, recoveries from unsecured asset classes and vehicle loans have been hit with the regulator taking a strict view of the recovery procedure followed by some financiers. 

Intensity of competition has a significant bearing on the credit profile of an NBFC, given that the prevailing or anticipated competitive intensity would influence the company’s growth prospects, earnings and management strategy. Our evaluation focuses on the current level of competition as well as the attractiveness of the segment for potential competition by assessing several factors including growth potential, entry barriers and risk-adjusted returns.


b) Ownership structure

Ownership structure could have a key influence on an NBFC’s credit profile in that a strong promoter and strategic fit with the parent can benefit an NBFC’s earning, liquidity and capitalisation, and hence its credit profile. In assessing an NBFC’s ownership structure, the parameters examined include, among others: the stature and credit profile of the promoter, shareholding pattern of the NBFC, operational synergies of the NBFC with its promoter, level of involvement of promoter in the NBFC, the level of commitment and criticality of the NBFC in the overall spectrum of companies under promoter’s fold, and the history of the promoter in providing fund support. 


c) Management quality

Quality of management, systems, processes and policies, shareholder expectations and the strategy followed to manage these expectations, and accounting quality are the foundation stones on which an NBFC’s credit risk profile is built. The importance of these factors is even higher for a new NBFC, one with a shorter track record, or one with a changing business profile. The composition of the board, frequency of change of CEO and the organisational structure of the company are critically examined. The company's strategic objectives and initiatives in the context of resources available, its ability to identify opportunities and favourable track record in managing stress situations are taken as positives. The extent of digitisation of the operations and adequacy of the information systems used by the management are evaluated. The evaluation focuses on the adoption of modern practices and systems, capabilities of senior management, personnel policies and extent of delegation of powers.


d) Risk Management System & Appraisal Procedure

A careful evaluation of the risk management policies of the NBFC is done as that provides important guidance for assessing the impact of stress events on the liquidity, profitability, and capitalisation of the company concerned. Further, the underwriting policies of the NBFC concerned is compared with the best practices in the industry to make an assessment of the company’s risk profile. The process of risk profiling also involves evaluation of the NBFC’s business sourcing practices (in-house vs. outsourced), besides its recovery and monitoring systems. 


e) Accounting Quality

Consistent and fair accounting policies are a prerequisite for financial evaluation and peer group comparisons. By virtue of being incorporated under the Companies Act, 1956, NBFCs are required to follow the applicable Accounting Standards prescribed by the Institute of Chartered Accountants of India. Further, the RBI has also issued prudential norms for NBFCs specifying the accounting methods to be used for income recognition, provisioning for bad and doubtful advances, and valuation of investments. In evaluating an NBFC’s accounting quality, the review is made with regard to the company’s accounting policies, notes to the accounts, and auditors’ comments in detail. Deviations from the Generally Accepted Accounting Practices are noted and the financial statements of the NBFCs are adjusted to reflect the impact of such deviations.


f) Size and Market Presence

For an NBFC, its networking strength determines its capacity to grow while maintaining reasonable risk- adjusted returns, and to maintain resilience of earnings, thereby facilitating predictability of its future financial performance. It may be noted that an NBFC with a significant market share and a niche position can both have a defensible networking (The larger company on the strength of its standing in the overall market and the smaller one on account of its unique offering or its strong relationship with the key participants in the credit chain of the target segment), which could, in turn, benefit their credit profile.  As for size, typically it is seen in relation to an NBFC’s loan mix and has a bearing on the company’s competitive position, diversity, credit risk concentration, stability of earnings and financial flexibility to ascertain the shock absorbing capacity.


Quantitative factors

The quantitative factors considered during the rating exercise are enumerated below:


a) Asset Quality

Asset quality plays an important role in indicating the future financial performance of an NBFC. Asset quality holds the potential to affect earnings (higher NPAs could dilute the yields and necessitate higher credit provisions) and capital (lower earnings could slow down the internal capital generation or in extreme situations {loss} could weaken the capital).The evaluation of asset quality begins with the examination of the NBFC’s credit risk management framework. Assessment is also made of credit risk concentration, trend in financial condition of customers, trend in delinquencies, Gross NPA percentage, Net NPA percentage, and Net NPAs in relation to Net Worth.  The NBFC's experience of loan losses and write off/provisions are studied carefully. The percentage of assets classified into standard, substandard, doubtful or loss and the track record of recoveries of the NBFC is examined closely. The portfolio diversification and exposure to troubled industries/areas is evaluated to arrive at the level of weak assets. In assessing diversification, the common factors include loan mix, portfolio granularity, geographical diversification and borrower profile. Restructured assets in NBFC’s total exposure are closely examined to arrive at the potential NPAs of the NBFC.


b) Resource Pattern 

Resource base of the NBFC is analysed in terms of cost and composition. Proportion of deposits /loans/bonds in funding mix is examined. Deposit growth rates and their rollover rates are also analysed. Dependence on market borrowings and average as well as incremental cost of funds is examined in the context of prevailing interest rate regime. Ability of the NBFC to raise additional resources at competitive rates is also examined critically.


c) Liquidity

It is important for an NBFC to maintain a favourable liquidity profile for the smooth functioning of its funding activity (fresh asset creation) and to honour its debt commitments in a timely manner. It is also important that an NBFC manages its interest rate risk, as the same could impact its future profitability.  In assessing an NBFC’s liquidity profile, the evaluation is done on the company’s policy on liquidity, the maturity profiles of its assets and liabilities, the asset-liability maturity gaps, and the backups available to plug such gaps. The evaluation also focuses on the diversity of the NBFC’s funding sources and their quality (i.e. availability of these sources in a stress situation).  The short term external funding sources in the form of unutilized lines of credit available from banks, etc. along with directed and other investments, if any, and their marketability are important sources of reserve liquidity.


d) Earning Potential

The purpose of the evaluation here is to assess the level of future earnings and the quality of earnings of the NBFC concerned, which is done by looking closely at the interest spreads, fee income, operating expenses, and credit costs.  The evaluation of an NBFC’s profitability starts with the interest spreads (yields minus cost of funds) and the likely trajectory of the same in the light of the changes in the operating environment, the company’s liquidity position, and its strategy. The ability of the NBFC to complement its interest income with fee income is also assessed. A large fee income allows greater diversification, which, in turn, can improve the resilience of earnings, thereby improving an NBFC’s risk profile. After assessing the income stream, the evaluation is done on the NBFC’s operating efficiency (operating expenses in relation to total assets, and cost to income ratio) and compares the same with that of its peers. Finally, the credit costs are estimated on the basis of the company’s asset quality profile, and the profitability indicators compared across peers. Importantly, a very high return on equity may not necessarily translate into a high credit rating, given that the underlying risk could be very high as well, and being so it could be more volatile or difficult to predict.  Return on Equity, Return on Capital Employed, Cost of Capital, Net Spread and Interest Coverage are also considered to be the important parameters for assessing the earning potential of an NBFC.


e) Capital Adequacy

Capital Adequacy is a measure of the NBFC’s ability to meet its obligations relative to its exposure to risk and also relates to the degree to which the NBFC’s capital is available to absorb possible losses. It also indicates the ability of the NBFC to undertake additional business. Riskiness of the product and granularly of the portfolio are factors that have a significant bearing on the amount of capital required to provide the desired degree of protection to an NBFC’s debt holders. The evaluation by Infomerics factors the conformity of the NBFC to the regulatory guidelines on capital adequacy ratio. Higher proportion of Tier I (core capital) in the overall capital is viewed favourably. Erosion of capital arising out of additional provisioning for NPAs and impact of mark to market gains/losses from investment portfolio on capital adequacy are also factored in.


f) Peer group analysis

Infomerics also carries out peer group comparison on each of the above discussed objective parameters with the NBFC’s performance. Detailed inter-company analysis is done to determine the relative strengths and weaknesses of the NBFC in its present operating environment and any impact on it, in future.

All relevant quantitative and qualitative factors are considered together, as relative weakness in one area of the NBFC's performance may be more than adequately compensated for by strengths elsewhere. However, the weights assigned to the factors are different for short term ratings and long term ratings. The intention of long-term ratings is to look over a business cycle and not adjust ratings frequently for what appear to be short term performance aberrations. The quality of the management, ability to raise resources, the trend in operating environment and the competitiveness of the NBFC are of greater importance in long term rating decisions.



The rating process ultimately determines the likelihood of the rated fixed deposit being repaid in full and on time. The assessment of management quality, the NBFC's operating environment and its role in the nation's financial system are used to interpret current data and to forecast how well the NBFC is positioned in the future. The final rating decision is made by the Rating Committee after a thorough analysis of the NBFC's position over the term of the instrument with regard to business fundamentals.



Rating Scale


(" Triple A")

Highest Safety

Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk

("Double A")

High Safety

Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk

("Single A")

Adequate Safety

Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk

("Triple B")

Moderate Safety

Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk

(“Double B") Moderate Risk

Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations

("Single B")

High Risk

Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations

Very High Risk

Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations


Instruments with this rating are in default or are expected to be in default soon


Infomerics may apply '+' (plus) or '-'(minus) signs for ratings from 'FAA' to 'FC' to indicate the relative position within the rating category. IVR BBB- is the minimum investment grade rating.


Approved in the BM dated 31.05.2022