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NBFC Financial Modeling

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NBFC Financial Modeling

The NBFC Financial Modeling is an essential tool that provides a systematic and analytical approach to strategic financial planning and decision-making in non-banking financial companies. It serves as a cornerstone for informed decision-making and long-term success.

The NBFC Financial Modeling provides cutting-edge techniques to draft financial models for the specific needs of NBFCs.

Types of Financial Models for NBFC

There are diverse types of financial modeling justifying the financial structure of the NBFC. Some of the prominent and relevant types of financial models for NBFC are mentioned below-

  • Three Statement Model
    The three-statement model only provides for three financial statements: profit and loss statement, balance sheet, and cash flow statement. It also specifies the preparation of subsequent schedules, namely depreciation, fixed assets, working capital, debt, and tax schedule. 

 

  • Convertible Model (Model with Scenarios)
    The convertible model shows different results based on the adjustments made in the model scenario. It is generally prepared by highly skilled financial analysts who have a deep understanding of three primary situations: optimistic (management), actual (base), and pessimistic (conservative or investor).
  • Credit Rating Model

The credit rating model, also termed the NBFC Credit Risk Management model, is generally prepared to assess the borrower’s creditworthiness and debt funding. Banks, NBFCs, or financial institutions are authorized to prepare a credit rating model to simplify the DSCR, Interest Coverage Ratio, Profit Margins, Debt Equity Ratio, etc.

 

  • Leveraged Buyout Model (LBO)

The leverage buyout model (LBO) is used to acquire the target company’s capital, debt, and equity shareholding raised from the banks, NBFCs, and financial institutions.

  • Discounted Cash Flow Model (DCF)

A discounted cash flow model (DCF) is the most prominent model that NBFCs must prepare for conducting valuation through the company’s cash flow. The DCF incorporates two types of valuation: Absolute and Relative Valuation.

 

  • Comparable Analysis Model

The comparable analysis model comprises three statements and a valuation model. The model provides for trading comparison by assessing the valuation of similar companies listed on the stock exchange.

  • Merger Model

The merger Model ensures that the financials and financial performance of target NBFCs are captured in mergers and takeovers by the acquirer NBFC.

  • NBFC Co-Lending Model

The NBFC Co-lending model establishes a partnership between banks and NBFCs to mitigate risks. By tapping large markets and accessing bank funding options, the co-lending model ensures a promising future for NBFCs and Fintech companies.

 

  • NBFC Liquidity Risk Model

The NBFC liquidity risk model ensures adherence to the liquidity risk management guidelines and master direction for systematically important Non-deposit and deposit-taking NBFCs. The tool adopted reports contravention of funding by instrument or currency.

 

  • NBFC Loan Portfolio Model

The NBFC loan portfolio model ensures that the NBFC Loan Portfolio Audit is used to identify and track loan application trends and optimize the sales portfolio.

Creating strategic NBFC financial planning involves a systematic approach, so here are the key steps to guide the process:

Process for Strategic NBFC Financial Modelling
  • Step 1: NBFC Financial Analysis of the Market
    The first step required for NBFC financial modeling is to conduct a market analysis to better understand current market conditions and economic factors. The analysis of market conditions regulates the financial performance of NBFCs. It also assists NBFCs in being updated on regulatory changes impacting the NBFC sector.
  • Step 2: Assessment of Risks
    The next step is identifying and assessing various risks (including credit, market, operational, regulatory, etc.) and developing strategies to mitigate them.
  • Step 3: Setting Object and Strategies
    Next, every NBFC must prepare a set of different objects and strategies comprising the optimal capital structure. Strategic financial modeling is necessary to consider the cost, availability, growth, and diverse funding options in NBFCs.
  • Step 4: Financial Plan Forecasting
    The next step in the NBFC financial modeling techniques allows the creation of a financial action plan that projects future revenues, expenses, and profits. This step develops a financial forecast that aligns with strategic NBFC financial planning.
  • Step 5: Review of Financial Plan
    In the next step, a key financial indicator (KPI) must thoroughly monitor and review the proposed financial goals and actual financial performance before implementing the financial plan. The review necessitates updating the strategic NBFC financial planning.
  • Step 6: Implementation of Financial Plan
    The final step allows the implementation of the proposed financial plan to establish financial control over the NBFC. Further, this stage requires the implementation of consistent financial decisions made by the stakeholders, investors, etc.
  • Step 7: Outcomes of Financial Modeling
    In the next step, after the successful implementation of the NBFC financial modeling, the key financial indicators must review the three outcomes, including the financial statements, operational cash flow, and Balance sheet of the NBFC.