CREDIT SERIES-1- Numbers are numbers

Case I- Compare peer profitability and understand  leverage

  • This was one of the key auto ancillary player. Fantastic profitability and excellent rating. I was doing a research on the margins across the value chain in this industry few years back. Even the most niche and sophisticated product in auto ancillary chain was not making the kind of EBIDTA margins which this company was making.
  • There were other customers also doing similar business but the margins declared by them was less than one-third of what it was showing consistently.
  • And the international operations and acquisitions of businesses in domestic and overseas locations was quite a frequent phenomenon.
  • The catch was the rising pile of debt and the ever continuing double digit margins in a low value add business.
  • Numbers looked something like this-


  • Finally the story had to end. Margins, sales started crumbling on one side and repayment obligations & debt piling on other side. Refinancing and new borrowings stopped.
  • What’s important to appreciate is that debt has to be looked not just as a debt/equity ratio, but as sales to debt as well.
  • The business is today looking for buyers which can make use of some of the good factories it had created. If it was not for these facilities and the employment opportunity, it would have been cast in history by now.

Note: These are personal views and in no way represent the organization(s) I am (was) part of.


Credit Series- Introduction

Spending 13 years in similar domain can be boring or can be interesting. So here I will be sharing some interesting observations I came across in this period.

To start with these are the points I came across while doing credit/ risk assessment over this period. For those not part of BFSI, these are the do’s and don’ts I followed when I was evaluating the financials and business sustainability in order to decide whether to lend or wait.

  1. Bank statements and business model are the best match makers.
  2. End use of funds is as important today as it was 20 years back.
  3. Numbers are numbers. It’s as objective as thing can get.
  4. Statutory dues and salary payments cannot be ignored.
  5. Related party and arm’s length.
  6. Risk and reward go hand in hand.
  7. See the numbers, meet the people but also give some weightage to your gut feel.
  8. Everything looking bad is not always bad and everything looking good is not always good.
  9. Numbers if don’t match there is a story to be uncovered.
  10. Don’t underestimate the potential of secondary research.
  11. If market intelligence points to something, explore that further.
  12. Do the basic stuff first, complex models can be built by many.
  13. If something is too complex, then it’s not normal. It may or may not be good

I will be covering each of these in a separate write up for each may or may not in this order.

I will be sharing my experience and approach in each of these. Feel free to share yours on these.

Note: These are personal views and in no way represent the organization(s) I am (was) part of.


Outsourcing- Yesterdays core, Today’s non-core

15 years back I started my first assignment with a company which used to help lenders- Banks and HFC’s outsource their activity on collections and recoveries so that they can focus on their core activities. Not all organizations had dedicated collections and recovery team at that time and the ones which had, didn’t had the kind of success rate which they were expecting.

So over the period we have had many regulations with clarity coming on how to deal with  assets which went bad. A new segment of entities which are experts in restructuring became prominent 10 years back- asset restructuring companies – ensuring quick resolution to the situation of collections/recovery/bad assets.

Two years back, Bankruptcy act got finally in action and we have professionals who are expert in this area- the resolution professionals.

So the thing is till all this while, credit assessment was one of the core activities of the lenders along with mobilization and deployment of funds. That is something which has undergone a tremendous change over the period.

The concept of CPC/CPA ( outsourced model  of doing credit assessment ) started to grow.  It is on verge on becoming the model now with this being the new KPO boom in India.

 Good part

  • More opportunities being created and helping in quicker service delivery considering these units work on 24*7 basis.
  • Technology being used as an enabler. .

 Not so good part

Sales is partly outsourced ( in terms of channels like DSA , co lending models with fintech firms etc), credit assessment on verge of being outsourced to a large extent in the times to come, entities specializing in collection/recovery & turning around already  there.

As of now decision to whether lend or not rest with lenders, but who knows that may or may not continue 10 years down the line.

So who will take the responsibility of collecting back the amount from customers esp for banks which has the depositors money.

Or will there be a new model wherein the depositors themselves put the money and decide on where they want to invest- a market place similar to REITS etc.