How a Kerala-Based NBFC Grew Its Loan Book by 48% While Halving Bad Loans: A Beginner's Guide to Reading NBFC Financial Statements

Reviewed by Kanishk Dev Bangia, NISM Series XV Certified Research Analyst

Last Updated: June 2026 | Reg. No: NISM-202300182946

Most investors are comfortable reading the financial statements of a manufacturing company. Revenue goes up, expenses go down, profits increase.

Simple.

But financial companies operate differently. For an NBFC, loans are the product, interest income is the revenue, borrowings are the raw material, and a negative operating cash flow can sometimes be a sign of growth rather than trouble.

This is why many beginners find NBFC annual reports intimidating.

Terms like Gross NPA, Capital Adequacy Ratio, Net Interest Income, and Debt-to-Equity Ratio appear everywhere, often without explanation.

In this article, we'll use the FY26 results of a Kerala-based NBFC as a practical case study to understand how investors can analyze any lending business, whether listed or unlisted. The company itself is not the focus. The goal is to learn how to connect the profit and loss statement, balance sheet, and cash flow statement into one coherent story.

First, What exactly is an NBFC?

A Non-Banking Financial Company (NBFC) is a financial institution that lends money but does not operate as a traditional bank. Unlike banks, NBFCs cannot accept regular savings and current account deposits.

Instead, they raise money through:

· Bank borrowings

· Bonds and debentures

· Equity capital

· Other institutional funding sources

They then lend that money to individuals and businesses while earning a spread between their borrowing cost and lending rate.

Many NBFCs specialize in particular segments such as:

· Vehicle finance

· Gold loans

· MSME lending

· Housing finance

· Consumer finance

· Microfinance

The FY26 Story in One Sentence

The entire year can be summarized with one statistic:

The company grew its loan book by 48% while simultaneously cutting its bad-loan ratio nearly in half.

That combination is harder to achieve than it sounds. Fast loan growth often leads to weaker underwriting standards and higher future defaults. Improving asset quality while expanding aggressively suggests disciplined growth rather than growth at any cost.

FY26 Snapshot

Lesson

Whenever you analyze an NBFC, begin by asking two questions:

1. Is the loan book growing?

2. Is asset quality improving or deteriorating?

Everything else flows from those answers.

Step 1: Reading the Profit & Loss Statement

For most businesses, revenue comes from selling products or services. For an NBFC, revenue comes primarily from interest income. The company's loan book expanded from ₹657 crore to ₹973 crore.

As a result, interest income increased by approximately 28%. This is exactly what investors want to see. The revenue growth was not driven by one-time gains or accounting adjustments. It was generated by the core business.

Step 2: Understanding Where the Profit Growth Came From

Many beginners stop after looking at revenue. Professional investors look at costs. In FY26, two major expense categories behaved very differently.

The increase in finance cost is understandable. The company borrowed more money to fund additional lending. What stands out is the operating-cost growth. While loans grew by 48%, operating costs increased only 17%. That is a powerful sign of scalability.

One of the Most Important Concepts: Operating Leverage

Operating leverage occurs when revenue grows faster than operating expenses. Think about a branch network. A company may already have:

· Branch offices

· Employees

· Technology systems

· Collection infrastructure

Once this infrastructure exists, it can often support a much larger loan book without proportional increases in costs. That is exactly what happened here. The existing business infrastructure handled significantly more lending activity without requiring a similar increase in expenses.

Step 3: Understanding Why Lower NPAs Matter

One of the most impressive aspects of FY26 was the reduction in Gross NPAs.

Gross NPA fell from 1.07% to 0.56%

For an NBFC, lower NPAs matter for two reasons. First, fewer borrowers are defaulting. Second, the company generally needs to set aside less money for potential losses. That directly supports profitability.

Think Like an Investor

Would you rather lend ₹100 crore and lose ₹5 crore to defaults? Or lend ₹100 crore and lose ₹1 crore?

The answer is obvious. Better asset quality improves both risk and profitability.

Step 4: Reading the Balance Sheet

A balance sheet answers two questions:

1. Where is the money invested?

2. Where did the money come from?

Where Was the Money Invested?

The majority of the asset growth came from loans. Loans represented roughly 80% of total assets. This is generally what investors expect from a lending business.

Idle cash does not generate meaningful returns. Loans do.

Where Did the Money Come From?

The company added more than ₹315 crore of fresh loans. Naturally, it needed funding.

It raised capital through:

· NCD issuances

· Bank borrowings

· Subordinated debt

Borrowings increased by more than ₹313 crore during the year. This is entirely normal for a lender. Unlike manufacturing companies, NBFCs need debt to create assets.

Step 5: Understanding Debt-to-Equity

One number that immediately catches attention is:

Debt-to-Equity Ratio = 5.88x

This means the company has roughly ₹5.88 of borrowings for every ₹1 of shareholder equity. For most industries, that would appear extremely high. For NBFCs, however, leverage is part of the business model. The more relevant question is whether the leverage is supported by:

· Healthy asset quality

· Strong collections

· Adequate capital buffers

· Sustainable profitability

Step 6: Why Negative Operating Cash Flow Is Not Necessarily Bad

This is where many beginners get confused. In a manufacturing company, negative operating cash flow often raises concerns. For an NBFC, it can simply mean the company is disbursing more loans.

During FY26:

· Operating cash flow was negative.

· Financing cash flow was strongly positive.

At first glance, this looks alarming. In reality, it makes perfect sense. The company raised money through borrowings and then deployed that money into new loans. Cash left the business because it was lent to customers.

The Most Important Metric Many Investors Ignore: Capital Adequacy Ratio

A lender's capital adequacy ratio acts as its financial safety cushion. The company reported Capital Adequacy Ratio (CAR): 19.84%

Regulators require financial institutions to maintain minimum capital levels. A stronger capital buffer provides protection against unexpected credit losses.

Five Questions to Ask When Reading Any NBFC Annual Report

Instead of memorizing dozens of ratios, focus on these five questions:

1. Is the loan book growing?

Growth drives future earnings.

2. Are NPAs stable or improving?

Growth without asset quality is dangerous.

3. Are operating costs growing slower than loans?

This reveals operating leverage.

4. How is growth being funded?

Debt-funded growth is normal, but leverage must remain manageable.

5. Is capital adequacy strong?

Strong capital provides resilience during difficult periods.

What This Case Study Teaches Investors

The Kerala-based NBFC's FY26 results provide a useful example of what healthy lending growth can look like.

The company:

· Expanded its loan book significantly.

· Improved asset quality.

· Increased profitability.

· Maintained a strong capital position.

· Scaled operations efficiently.

More importantly, it demonstrates how all three financial statements connect. The loan book drives interest income. Interest income drives profit. Borrowings fund loan growth. Asset quality affects risk. Cash flow explains how expansion is financed. When viewed together, the numbers tell a complete story.

Frequently Asked Questions (FAQs)

1. What is an NBFC?

A financial institution that provides loans and credit services without operating as a traditional bank.

2. Why is loan-book growth important?

A larger loan book generally creates higher future interest income.

3 What is Capital Adequacy Ratio?

A measure of how much capital a lender holds relative to its risk-weighted assets.

4. Why do NBFCs borrow so much?

Borrowings provide the capital that NBFCs lend to customers.

5. Why can operating cash flow be negative?

Because cash leaves the company when loans are disbursed.

Disclaimer:

This is written for educational and informational purposes only. Nothing here constitutes investment advice or a recommendation to buy or sell securities. All data is sourced from publicly available information. Investments in securities markets are subject to market risks — please read all offer documents carefully before investing.