A credit fund is offered a three-year NCD of an AA minus NBFC at 10.4%, 290 basis points over AAA. Gross NPA is 4.8% and rising, 42% of borrowings are commercial paper due within a year, and the one-year asset-liability gap is negative. Identify the risks and decide.

Pass at this size and tenor; the spread pays for the credit risk but not for the funding structure. The lender has a year-one gap of about Rs 1,016 crore between money due in and money due out, after counting its cash; its Rs 800 crore of undrawn lines leave Rs 216 crore to be refinanced by lenders watching NPAs rise, and if collections fall 20% that becomes about Rs 986 crore. A 2% position earns about 6 basis points of extra yield a year for the fund and loses about 120 in a default.

A shopkeeper who buys stock on 30-day credit and sells it on 12-month instalments is fine until the day the wholesaler stops extending credit; then he is bankrupt with a shop full of good stock. The order that matters for a lender is funding first, credit second, because bad loans take quarters to kill a lender, while a refusal to roll over its paper takes a week. Here the list reads: 42% of borrowings is commercial paper due within a year; NPAs are 4.8% and rising, which is why those lenders might not roll; the loans are to small businesses against property, which is slow to sell in a bad year; and the spread of 290 basis points is being paid to compensate for all of this at once.

Line up what comes in against what goes out by date. Within a year, about Rs 4,450 crore comes in from loan repayments and cash, while Rs 5,466 crore of borrowings falls due. That is a gap of about Rs 1,016 crore, 8.5% of assets, which the company plans to fill by issuing new paper, and the whole question is whether anyone will buy it. The two later buckets show a surplus, so the business is sound if it can get through year one. That is the shape of every NBFC that got into trouble: solvent on paper, illiquid in practice.

Shrink the inflows, since rising NPAs mean borrowers are paying less. If collections fall 20%, year-one inflows drop to about Rs 3,680 crore and the gap widens to about Rs 1,786 crore. The cash is already counted in the inflows, so the Rs 800 crore of lines leaves the company about Rs 986 crore short, against Rs 216 crore in the base case, before anyone has refused to roll a single commercial paper. Banks also tend to cut undrawn lines at exactly the moment a borrower's NPAs are rising, so the Rs 800 crore is softer than it looks. The equity of Rs 2,000 crore does not help with any of this; it absorbs losses, it does not pay maturities.

Size the trade from the fund's side. A 2% position at 290 basis points over AAA adds about 6 basis points a year to the fund's return. A default with 40% recovery costs about 120 basis points of NAV, roughly 21 years of the extra carry, and the funding structure makes a default a one-week event rather than a slow slide you could sell into. So: pass on the three-year NCD at 2%. If the desk wants exposure, the honest version is a much smaller position in a shorter instrument that matures before the refinancing wall, secured on specific loan pools, and only after seeing the lender's monthly collections and its bank lines in writing. The limit of this analysis is the data: the maturity buckets are the company's own estimates, and a credit analyst would rebuild them from the loan-level schedule before trusting any of it.