Industry Insights

5 Key Ratios for Commercial Loan Underwriting

Over time, financial ratios have been used to quickly evaluate the financial and operational health of a company. Ratios are precise, yet elaborate enough in their own way.

Most of these ratios can be calculated through financial statements and then compared with industry benchmarks to get a broader understanding. For bankers, the interpretation of the ratio is far more critical than the computation. Validation of solvency and performance are the two essential characteristics of such financial ratios.

Selection of critical ratios is essential for bankers to access asset management, capital management, liquidity, risk, and profitability.

To make it easier we have listed five key financial ratios required for commercial loan underwriting:

5 Key Financial Ratios to Commercial Loans Undertaking - A detailed InfographicProfit Margin Ratio: This is a widely used profitability ratio, and it indicates the amount of profit generated over sales. This ratio measures the company’s ability to earn enough profit to sustain its business. Profit margins often vary from industry to industry, so, a prudent banker should always compare it with close competition and with the average industry standard.

Debt Ratio: This is a solvency ratio, which indicates the debt level of the borrower as a percentage of total assets. A lower debt ratio suggests more stable business and the higher is reverse. A ratio of 0.5 or less is considered as healthy, as this means the company has two times the assets as compared to liabilities. Anything more than 0.5 should be carefully examined before consideration.

Loan to Value (LTV) Ratio: This is a risk assessment coverage ratio that is very critical for mortgage underwriting. The LTV ratio ensures that the collateral is worth higher than the size of the loan. Higher the LTV ratio, more the risk involved.

Debt Service Coverage Ratio (DSCR): This is a liquidity ratio, which indicates the amount of cash generated by the business to service its debts (principal, interest, and leases). DSCR validates the borrower’s capacity to pay back the debt and keep running the business. DSCR between 1.25-1.5 is a relatively safe number to consider. However, it differs from business to business and depends on the risk aversion policies of the bank.

Net Worth to Loan Size Ratio: This ratio is used to compare the borrower’s net worth to the size of the requested loan. A high net worth indicates stable financial health, ultimately ensuring the repayment of the loan.

Ratio analysis is a proven technique to carry out quantitative analysis. However, financial ratios often vary across different industries and sectors, and comparisons between entirely different companies might not be advised.

So, it is advisable to examine industry peers through PEER COMPARISON to get more meaningful insights about the industry.

Use Probe42 to

  • Access key ratios by downloading financial statements in an excel format
  • Compare with peers in the same industry
The Probe Newsletter February 2021

Universe of Registered Companies

  • As of Jan-2021, there were 22,30,547 companies incorporated out of which 13,17,832 are active.
  • 21.3% companies were incorporated after CY2018.
  • There are 7,941 active companies in Chandigarh city.
  • The chart does not include LLPs.

Company Classification

  • There are 11,295 active foreign companies in India.
  • 269 companies in India has unlimited liabilities.
  • 23,031 companies are not for profit company in India.

Probe New Company and LLP Incorporations Index

  • The Probe New Company and LLP Incorporations ( PNCLI) Index was constructed using Dec-00 as the base year.
  • In Jan-21, index value stood at 567 with 178,761 companies registered in the last 12 months.
  • 88,472 companies were incorporated in last 6 months.

New Company Incorporations

  • In Jan-21, 10,924 companies were incorporated of which 10,681 are private and 243 are public.
  • During the month of Jan-21, 795 companies were registered in Karnataka state.
  • 2,375 companies were registered under manufacturing business in Jan-21.

Company Incorporations – State-wise data

  • 1,057 companies incorporated in Uttar Pradesh which accounted 9.7% of total incorporation.
  • In Jan-21, 1,343 companies were incorporated in RoC Mumbai.
  • During the month of Jan-21, 5.2% of total companies were registered in Haryana state.

LLP Incorporations State-wise data

  • During the month of Jan-21, 3,293 LLPs were incorporated in India.
  • Gujarat stood at the 2nd position with 359 new LLP incorporation.
  • 638 LLP were incorporated under the trading business.

Nationwide Spread

  • There are 1,30,967 active companies which constituted 9.9% of total active companies.
  • 4,159 active company in Delhi are not for profit company.
  • As of Jan-21, Tamil Nadu has 86,543 active companies.

Statewide Spread – Karnataka

  • As of Jan-21, there are 88,310 active companies in Karnataka out of which 81.0% incorporated in Bengaluru city.
  • 2,665 companies are registered in Mysuru city.
  • There are 199 listed companies in Karnataka.

Paid Up Capital

  • 7,03,814 companies has paid up capital of upto Rs 1 lac.
  • As of Jan-21, 382 companies in Pune has paid up capital of more than Rs 25 cr.
  • 14% of the total active companies has paid up capital between Rs 1 – 5 lac.

Directorship Overview

  • As of Jan-21, there are 22,30,303 active directors
    in India.
  • Till Jan-21, there are 59,629 active foreign directors in India.
  • Gujarat has 1,47,233 active directors which constituted 6.6% of total directors.
The Probe Newsletter December 2020

Universe of Registered Companies

  • As of Nov-20, there are 22,03,735 companies registered in India out of which 12,93,006 companies are active.
  • Currently, there are 24,051 active companies in the state of Andhra Pradesh.
  • 19.7% of total active companies were incorporated after CY2018.
  • The chart does not include LLPs.

Company Classification

  • Presently, there are 11,62,689 private ltd companies in India.
  • 741 companies are incorporated under the guarantee & association.
  • There are 2,002 government company in India.

Probe New Company and LLP Incorporations Index

  • The Probe New Company and LLP Incorporations (PNCLI) Index was constructed using Dec-00 as the base year.
  • In Nov-20, index value stood at 561 with 139,784 companies and 36,886 LLP registered in the last 12 months.
  • In the last 6 months, 90,631 companies were incorporated in India.

New Company Incorporations

  • In Nov-20, 13,453 companies were registered out of which 13,154 were private and 299 were public.
  • 768 OPC (One Person Company) were incorporated in India in Nov-20.
  • During the month of Nov-20, 1,622 companies were incorporated under the trading business.

Company Incorporations – State-wise data

  • 628 companies were incorporated in the state of Haryana in Nov-20.
  • In Nov-20, 477 companies were registered under the finance business.
  • In RoC Ahmedabad, 645 companies were registered in Nov-20.

LLP Incorporations State-wise data

  • During the month of Nov-20, 3,793 LLPs were incorporated in India.
  • New LLP registration witnessed decline by 22.5% when compare to Oct-20.
  • Gujarat with 428 registration stood at 2nd position in terms of LLP registration in Nov-20.

Nationwide Spread

  • Till Nov-20, there are 1,29,687 active companies in West Bengal which constituted 10.0% of total active companies.
  • 69,580 companies are active in Gujarat state.
  • As of Nov-20, 6,813 companies are listed in India.

Statewide Spread – Uttar Pradesh

  • As of Nov-20, there are 89,861 active companies in Uttar Pradesh.
  • Noida has 13,559 active companies which accounted 15.1% of the total active companies in the state.
  • 260 companies the Uttar Pradesh has paid up capital of more than Rs 2 cr.

Paid Up Capital

  • Currently, there are 6,85,367 active companies with upto Rs 1 lac paid up capital.
  • Mumbai has 2,313 companies with paid up capital more than Rs 2 cr.
  • 9.0% active companies have paid up capital between Rs 15-50 lac.

Directorship Overview

  • Currently, there are 22,56,126 active directors in India.
  • Till Nov-20. There are 62,101 active foreign directors in India.
  • There are 1,50,498 active directors in the state of Karnataka.
The Probe Newsletter November 2020

Universe of Registered Companies

  • Till Oct-20, there are 21,89,385 companies incorporated out of which 12,80,520 companies are active.
  • As of Oct-20, 70,809 companies were active in Telangana state.
  • 42.6% of total active companies were registered after CY2015.
  • The chart does not include LLPs.

Company Classification

  • Currently, there are 60,574 public ltd companies in India.
  • As of Oct-20, there are 32,857 OPCs in India.
  • There are 11,010 foreign companies in India.

Probe New Company and LLP Incorporations Index

  • The Probe New Company and LLP Incorporations (PNCLI) Index was constructed using Dec-00 as the base year.
  • In Oct-20, index value stood at 548 with 1,36,938 companies and 35,638 LLP incorporated in the last 12 months.
  • 82,100 LLPs were incorporated in the last 6 months.

New Company Incorporations

  • During the month of Oct-20, there are 16,707 company registration out of which 16,323 were private and 384 were public.
  • 3,739 companies were incorporated under the manufacturing business in the month.
  • In Oct-20, 795 companies incorporated in RoC Chennai.

Company Incorporations – State-wise data

  • During the month of Oct-20, Karnataka stood at the 4th position with 1,262 companies registered in the state.
  • In the month of Oct-20, 536 companies registered in the education business.
  • 13,323 companies were incorporated with the paid up capital of up to Rs 1 lac.

LLP Incorporations State-wise data

  • In Oct-20, there are 4,895 LLPs registration in India.
  • There are 215 LLP registration in the state of Tamil Nadu in Oct-20.
  • During the month of Oct-20, 466 LLP registered in Gujarat state which constituted 9.5% of total LLP registered in the month.

Nationwide Spread

  • Uttar Pradesh stood at the 4th position with 88,634 active companies which accounted 6.9% of total active companies.
  • As of Oct-20, 41,064 active companies incorporat ed in the Rajasthan state out of which 20,752 companies are registered in Jaipur.
  • Till Oct-20, there are 8,764 active companies in the Assam state.

Statewide Spread – Maharashtra

  • Till Oct-20, there are 2,49,304 active companies in the state.
  • In Maharashtra capital – Mumbai there are 1,31,984 active companies which constituted 52.9 % of total companies in the state.
  • There are 1,848 listed companies in Maharashtra.

Paid Up Capital

  • As of Nov-20, there are 1,79,779 active
    companies between Rs 1 – 5 lac.
  • Delhi has 1,15,609 active companies with paid up capital of up to Rs 1 lac.
  • Currently, there are 22,561 companies with more than Rs 10 cr paid up capital.

Directorship Overview

  • Presently, there are 22,12,988 active directors in India.
  • As of Oct 20, there are 61,351 active foreign directors.
  • In Gujarat there are 1,44,765 active director which constituted 6.5% of total active director.
Understanding Neo Banking In India – 2

We keep hearing about Neo Banks these days. Here is a small write on what they do and their current landscape.

Neo Bank is a new type of digital bank that exists without any branches. They are primarily fintech firms providing digital and mobile-first financial solutions services to modern tech-savvy customers. These include payments and money transfers as well as lending through online platforms and apps. Neo banks are reinventing the practices and processes associated with traditional banking.

This new-age banking emerged about 5 years ago, namely in the UK through FinTech players such as Monzo and Atom Bank.

Neo Banking in India

Neo Banking in India is of 2 types – consumer facing and business facing. The Neobanking journey in India started out with Open in 2016 for small businesses to go digital. Now, even YouTubers and freelancers are registering on its platform as businesses. On the consumer side, Bengaluru-based Niyo started operations in the same year, but targeting blue-collar workers, taking the B2B2C route. Some Neo banks in India are in the beta stage or just about to launch operations.

Difference between Digital Bank vs Neo Banks

Digital banking usually refers to a bigger player in the banking industry providing financial services in a traditional way. Neo banks are 100% digital and do not relate to any traditional banking names, big or small.

Banks which entered Digital Banking:-

  1. Yono by SBI
    YONO (You Only Need One) is State Bank of India’s digital banking platform which was launched in November 2017.  Apart from banking services, the platform also provides lifestyle services like cab booking and online shopping.
    The country’s largest lender is looking to acquire a customer base of up to 250 million using this platform in the next two years
  2. ICICIStack by ICICI Bank
    ICICI Bank launched ICICIStack digital service ahead of the coronavirus outbreak in the country. ICICIStack is another digital platform allowing users to open saving accounts, instant PPF, and a list of about 500 services covering all the banking requirements. The ICICIStack is available on the internet banking platform or mobile phone app.
  3. 811 by Kotak
    The product was launched in March 2017 and is named after the day demonetisation was announced in India – November 8, 2016. It is a zero-maintenance bank account, along with a virtual card and one can also earn a 6 per cent interest per annum on their savings. Within two years of the launch, the bank claims to have doubled its customer base to 16 million users.

Fintechs vs Neo Banks

There are apps like Google Pay, Paytm and Phone Pe in India which provide payment and investment solutions. “Some solutions that Neo-banks address could be similar to the current offerings of other fintechs. But they are also addressing problems in banking that others fintechs don’t. Also, with better insights on the funds of customer, they are in a position of offer better solutions”. For example, if the customer has ₹10,000 lying in the account for some weeks, the AI can suggest that the money be kept in a liquid fund or a sweep-in fixed deposit that can earn better returns. This can be done in a few clicks. In the case of other apps offering solutions, the customer needs to be proactive to do this.

In other words, Neo Bank is a traditional bank with the better features to offer. They provide customisable services to the customer, better customer service, money management etc.

Advantages of Neobank:-

  1. Easy account creation
  2. Seamless international payments
  3. Customer friendly interface
  4. Value added services like bookkeeping, financial management etc

Challenges faced by the Neobank:-

  1. Targeting customer segments
  2. Arriving at best market-fit product for the customer segment
  3. Partnership with traditional bank
  4. Technology challenges – core banking systems used by most banks do not meet some of the expectations for modern digital services

Are Neo Banks in India secure?

When somebody opens Neo bank a/c they have a traditional bank a/c in the backend. Neo-banks are mandated to follow the same set of regulatory requirements such as data localisation norms or 2-factor authentication for card-based transactions. Additionally, Neo-banks are among the first to adopt more advanced transaction security enhancing models such as MCC block, single-use virtual cards, and token online transactions.

Regulatory norms for Neobank: –

In India, RBI is still not granting Banking licenses to virtual banks. Currently, Neo Banks are outsourcing their banking responsibilities to those with licencesiecreating strategic partnerships with traditional banks.

Focus Business Segment for Neo Banks in India: –

Neo Banks main focus are especially young generation who are digitally savvy consumers and who don’t want to deal with traditional banks due to lack of flexibility. This generation wants to compare online loans, submit their application with a few clicks, and receive approval in a matter of minutes. And this is exactly what neo-banks offer them: speed, friendly customer support, and relevant services. Neo-banks are all about convenience and respect for the customer’s time. Some of the players are available in both B2B and B2C segments.  In terms of customer base Niyo – one of the leading Neo bank has ~ 1 Million customers and B2B leading player Open has ~ 0.4 Million customers. Below are the details of some B2B and B2C players.

B2B companies Product feature offering

Retail companies Product Feature Offering

Funding Details of Indian Neo Banks: –

During the period of Q1’20, India fintech companies has raised $421 M. New-born Neo Bank – Jupiter which is founded by Citrus pay co-founder raised $ 2 M on Apr-20. Below are the more details of Neo Banks funding: –

Neo Banks and their Banking Partners

Transaction / New Entrants in Indian Neo Banking Industry: –

  1. Niyo acquired Goalwise
    Niyo has acquired mutual fund investment startup Goalwise for an undisclosed sum in a cash-and-stock deal on July 2020
  2. Singapore fintech company Atlantis enters India
    Atlantis, a Singapore-headquartered fintech company has announced the launch of Neo-Bank for Gen Z and millennial
  3. Cashaa plans to enter India
    London-based crypto-friendly banking platform Cashaa plans to enter India, US, and Africa
  4. Sokin enters India with Razorpay partnership
    Sokin – London based company has entered into partnership with RazorpayX, to provide its clients with a fully operational business banking service including current accounts which can be seamlessly integrated with Sokin’s simple app, or online-based platform, which allows multiple international transfers with no hidden costs, all for a fixed monthly fee

Covid-19 impact in Neo Banking: –

COVID-19 has given birth to fears pertaining to the contamination of coins and notes with this transmissible virus. Consumers are also worried about the possibility of banking professionals being infected with the contagion and thereby, becoming vectors of this disease in the process. Thus, the need to embrace digital transactions has become more urgent and pertinent than it was four years ago. Neobanking is one solution to facilitate this shift.

There is a long lasting impact of pandemic in digital mode of payment The pandemic has changed how people think about their choice of payment options. According to a recent study from Forrester Research, retailers reported a 69% increase in contactless transactions since January.

According to a yStats report released in June, nearly 50% of global shoppers were using digital payments more than before the pandemic, and the majority plan to continue doing so after the virus is contained. In future, many of fintech companies may also enter Neo Banking.

Neo-Banking Future Prospects: –

Credit to GDP Ratio in India is 50% where as it is north of 100% for developed countries. Credit reach definitely needs to improve in India. More bank licenses is surely one way but a thought on giving a systematic push towards digital channels of fulfilling the credit need of the country may go a long way. Moreover, the recent Covid situation has underscored the imperative of quickly scaling banking and credit services to consumers and small businesses.

According to a report published by Allied Market Research, the global neo bank market is growing at a CAGR of 50.6% during the period 2017-2020. Thus, e can confidently say that they are here to stay and grow the pie of the borrowing customers.