The first slide of the investor presentation says assets under management grew 26% to ₹24,000 crore. You then open the balance sheet, because that is where loans live, and the loan book has grown 11% to ₹18,600 crore. Neither number is wrong and neither is a typing error. The gap of ₹5,400 crore is loans the company originated, still services, still collects from, still sends recovery agents after — and has sold. Somewhere in the other income line is a gain of ₹185 crore booked on selling them, which is roughly a quarter of the year’s pre-tax profit. That gain is not new money: it is the present value of the margin the company will earn on those loans over the next several years, counted now instead of then — so the years it belongs to will show none of it. Everything in that paragraph is disclosed. Almost none of it is in the headline.
A man owns six shops and collects rent from all of them. He sells the next eight years of rent from two of the shops to an investor for a lump sum today, and keeps collecting the money each month and passing it on, for a small fee. Ask him how many shops he manages and the honest answer is six. Ask him how many he earns the rent from and it is four. Ask him what his income was this year and the lump sum is in it, once, for rent that arrives over eight years.
A finance company that sells down loan pools is in exactly that position. The relationship with the borrower is intact, the servicing is intact, the collection machinery is intact — and the interest belongs to a buyer. “Assets under management” counts the shops. The balance sheet counts the rent.
Three ways a loan leaves the balance sheet and stays in the business
| Route | What happens | Where the loans sit afterwards |
|---|---|---|
| Securitisation | A pool of loans is transferred to a trust, which issues pass-through certificates to investors. The originator keeps a prescribed minimum slice of the pool and usually provides some credit support behind it | Frequently still on the balance sheet. Because the retained slice and the credit support mean substantially all the risks and rewards have not been transferred, the accounting standard often requires the loans to stay, with the money received recorded as a borrowing |
| Direct assignment | A portfolio is sold outright to a buyer, commonly a bank buying loans that count towards its priority sector obligations. The seller keeps a prescribed minimum share of every loan and continues to service them | Off the balance sheet, where the transfer qualifies. The retained share stays on it, and so does any residual exposure the arrangement leaves behind |
| Co-lending | The finance company originates the loan and keeps an agreed minimum share of it; a partner bank funds the rest from the outset under a pre-agreed arrangement | Only the company’s own share is ever on its balance sheet. The whole loan is generally counted in assets under management, because the company sourced it and services it |
The gain that is next year’s interest, brought forward
When a portfolio qualifies to come off the books, the seller is not simply paid the outstanding principal. It sells loans yielding, say, 16% to a buyer content with 10%, retains the servicing, and the difference between those two rates over the remaining life of the pool belongs to the seller. That stream is the excess interest spread, its present value is recognised as a gain on assignment at the moment of sale, and it lands in other income in a single quarter. Nothing about that is improper — it is the required treatment for a transfer that qualifies. It has three consequences for anybody reading the results.
- The quarter is flattered and the flattery is not repeatable at that scale unless the company sells a similar pool again, which means growth in profit can require growth in sell-downs rather than growth in lending.
- The following quarters lose the interest income those loans would have produced, so net interest margin computed on a shrunken on-book base can rise while the business earns less.
- The gain rests on assumptions — how fast borrowers prepay, and how many default — because both reduce the spread actually collected. Faster prepayment than assumed means part of the recognised gain never arrives. Those assumptions are disclosed and are worth reading against the company’s own history of prepayment.
- Cash in, immediately, against loans that would have paid out over years.
- Capital freed, so the company can write more loans without asking shareholders for money.
- Funding diversified — a buyer of portfolios is not the same lender as a buyer of debentures.
- A demonstration that somebody else, with their own credit team, was willing to pay for this book.
- It did not remove the risk. A retained share and credit support keep a defined slice of the losses.
- It did not create income. It moved future interest into the current year.
- It did not improve the ratios that were computed on the on-book figure — it shrank their denominators.
- It did not reduce the servicing work, the branch network or the collections cost, all of which continue.
A finance company reports pre-tax profit up 22%, with assets under management up 26% and on-book loans up 11%. Gains on derecognition were ₹185 crore against ₹60 crore last year. What is the most useful reading?
Aapke paas 6 dukaan hain, sabse kiraya aap hi uthate ho. Do dukaano ka agle 8 saal ka kiraya aapne ek investor ko ek mushat bech diya — chaabi aapke paas, kirayedaar se baat aap hi karte ho, paisa uska. Ab bataiye: dukaan kitni? Chhe. Kiraya kitni ka? Chaar ka. Company ka slide bolta hai AUM ₹24,000 crore (26% growth), balance sheet bolta hai loan ₹18,600 crore (11% growth) — dono sach hain, ₹5,400 crore beech mein hai. Aur us bechne ka ₹185 crore ka gain saal ke ₹760 crore pre-tax profit ka lagbhag chautha hissa hai — jo agle saal tabhi aayega jab phir se utna hi becha jaaye.
- Assets under management can include loans the company has sold, so it is not the same series as the loan book on the balance sheet.
- Derecognition turns on whether substantially all risks and rewards were transferred — securitised pools frequently stay on the books, assigned portfolios frequently do not.
- A qualifying sale books the present value of the future spread as a gain now, and removes that interest from later years.
- A retained share and credit support mean the risk is reduced rather than removed, and both are disclosed.
- Extract three figures each year: off-book share of assets under management, gains on derecognition as a share of pre-tax profit, and credit support outstanding.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- difference between securitisation and direct assignment
- In securitisation a pool of loans is transferred to a trust that issues pass-through certificates to investors; in direct assignment a portfolio is sold outright to a buyer, commonly a bank acquiring loans that count towards its priority sector obligations. The accounting usually differs too — a securitisation frequently leaves the loans on the originator’s balance sheet with the cash recorded as a borrowing, because the retained slice and credit support mean the risks have not substantially moved, whereas a qualifying direct assignment takes them off.
- why is aum higher than the loan book of an nbfc
- Because assets under management include loans the company originated and still services but no longer owns — pools sold through direct assignment, and the partner bank’s share of co-lent loans — while the balance sheet shows only what the company owns. That is how AUM can grow 26% in a year while on-book loans grow 11%. The two are reconcilable from the disclosures, and it is worth doing before treating either figure as the growth rate.
- gain on assignment meaning
- Gain on assignment is the profit a lender books when it sells a loan pool that qualifies to come off its balance sheet: the present value of the excess interest spread, being the difference between the rate borrowers pay and the rate the buyer accepts, over the remaining life of the pool. It is recognised in other income in the quarter of sale, so several years of margin land in one period and the later years show none of it.
- loans sold by an nbfc leave its balance sheet only if
- Substantially all the risks and rewards of those loans have passed to the buyer — that is the derecognition test, and it is applied to every transfer. Where it is met, the loans come off and a gain or loss is recognised immediately; where it is not, the loans stay and the cash received is treated as a borrowing. It is why two deals that both look like selling loans to a bank can produce completely different financial statements.
- how much of a loan pool must an nbfc retain when it sells it
- A prescribed minimum share of the pool, called the minimum retention requirement, which exists so the originator stays exposed to its own underwriting rather than selling the consequences of it. The RBI sets the percentage in its directions on securitisation and on transfer of loan exposures, and it varies with the type of transaction and the tenor of the underlying loans, so read the applicable figure from the current directions or the company’s own disclosure rather than assuming one number covers every deal.