Why AUM Matters for NBFCs and What It Teaches Us About Growth

As a finance student, understanding how companies manage and scale their operations is crucial. One metric that often comes up when studying Non-Banking Financial Companies (NBFCs) is Assets Under Management (AUM). It’s more than just a figure—it’s a reflection of how well these companies serve their customers and manage risks while growing their business.

Breaking Down AUM

AUM, or Assets Under Management, is the total value of financial assets that an NBFC manages for its clients. It’s a key measure of a company’s size and success. A rising AUM shows that a company is expanding its lending, gaining more clients, and managing its portfolio effectively.

For example, if an NBFC reports a 30% year-on-year growth in AUM, it signals that the company is increasing its outreach and lending capacity. It’s not just about having a larger loan book—it’s about doing it sustainably without compromising asset quality.

How AUM Reflects Strategy

NBFCs use AUM growth to demonstrate their ability to adapt to changing market needs. Companies like HDFC Ltd and Bajaj Finance stand out because of their consistent AUM growth. HDFC, with its focus on housing finance, reflects India’s growing demand for homeownership. Bajaj Finance, on the other hand, has diversified its offerings to include personal loans, consumer durables, and credit cards, allowing it to capture a broader customer base.

AUM also shows a company’s ability to innovate. Some NBFCs focus on niche areas, such as vehicle financing or small business loans, tailoring their products to meet specific needs. This strategic approach often results in steady AUM growth.

The Link Between AUM and Disbursements

AUM doesn’t grow in isolation. It’s closely tied to disbursements, which indicate how much credit a company extends to its customers in a given period. A company with strong disbursement growth is likely to show consistent AUM growth as well. For instance, when an NBFC reports quarterly disbursements of over ₹7,000 crore, it reflects strong demand and operational efficiency.

As a student, I find it fascinating how disbursements also offer insights into consumer behavior. Growth in housing finance disbursements suggests increased demand for homes, while higher personal loan disbursements might indicate rising discretionary spending.

Challenges in Managing AUM

While AUM growth is a positive indicator, it comes with challenges. One major concern is asset quality. An increase in Non-Performing Assets (NPAs) can weaken a company’s loan book and affect profitability. For example, if an NBFC’s NPA rises from 1% to 2%, it might signal potential issues in its lending practices or customer repayment ability.

Regulatory compliance is another critical factor. The Reserve Bank of India (RBI) regularly audits NBFCs to ensure they adhere to fair practices. Failing to meet these standards can result in penalties and impact the company’s reputation.

Case Study: Poonawalla Fincorp

A recent example I came across is Poonawalla Fincorp. The company reported strong AUM growth alongside healthy disbursements, signaling its ability to scale effectively. Their liquidity position also caught my attention—it shows they’re prepared to meet future financial demands.

However, like many NBFCs, Poonawalla Fincorp has faced challenges. A rise in NPAs and a regulatory fine from the RBI serve as reminders of the sector’s inherent risks. These ups and downs make it clear why NBFCs must strike a balance between growth and risk management.

Lessons for Finance Students

Studying metrics like AUM and disbursements offers valuable lessons about the financial industry. It’s not just about numbers; it’s about understanding the strategy and execution behind them. For instance, observing how NBFCs like HDFC or Bajaj Finance diversify their portfolios can teach us about risk management and market adaptability.

AUM growth also offers insights into broader economic trends. For example, rising AUM in housing finance suggests increased consumer confidence and demand for homes. On the other hand, growth in personal loans might reflect changing spending patterns or financial stress in certain segments.

Final Thoughts

AUM is more than just a metric; it’s a story of growth, strategy, and market dynamics. As finance students, analyzing these numbers helps us understand how companies operate, adapt, and thrive in competitive markets. For me, it’s a way to connect what I learn in theory to real-world applications.