ICRA’s Financial Sector Debt Ratings cover entities like Banks and Financial Institutions, Non-Banking Finance Companies (NBFCs) and Housing Finance Companies (HFCs). While all of these entities perform the same function of leveraging own funds and lending to others on a cost-plus basis, there are significant differences between them in terms of scale of operations, products and services offered, product delivery, regulatory requirements, and internal control systems. Moreover, the risk profiles of these type of entities can be quite varied. Depending on their requirement and ability to borrow the funding mix of these entities vary significantly, and include term loans, debentures, public deposits, working capital demand loan, cash credit from banks, commercial paper, and Mibor-linked loans, among others.

While NBFCs and HFCs flourished in the Indian subcontinent initially on account of regulatory differentiation, in the current scenario, there is a significant overlap between the business areas of HFCs and NBFCs on the one hand and with that of Banks and Financial Institutions on the other. ICRA’s ratings factor in the gamut of risks that can possibly affect the operations of a finance company: operating risks, financial risks, and management risks. The key determinants of operating risk include volatility in revenues and expenses, regulatory risks, risk of administrative expenses going out of hand, and risk of deterioration in asset quality. Financial risk, on the other hand is driven by capital adequacy, asset liability management, solvency, financial flexibility, and also accounting quality. Management risks cover the subjects of management quality and efficacy of systems.