Every business venture requires an adequate amount of funds to run its day to day operations. Insufficiency in finances can hinder the progress and compels one to shut down the business. Fund requirement gets double in case of financial entities like NBFC’s. Non-Banking Financial Companies renders credit services after attaining NBFC License but without a banking License. Such Companies do not depend upon deposits of Current Account Savings Account (CASA) for fundraising. CASA deposits are only applicable for banks; wherein RBI grants Licenses to banks to accept cash from the public. NBFC’s are deprived of such leverages. Therefore, NBFC must search for alternate financial sources of the money supply.
Importance of business funding in NBFC
Any registered NBFC startup needs fundraising to serve its business objective. Regardless of having a potent business plan, NBFC can fail due to lack of capital. NBFC plays a dominant role in the growing economy of India as it catches the attention of Fintech Companies. As a result, Fintech Companies collaborate with NBFC’s for innovating technology-driven tools.
A venture capitalist initiates funding for a startup at preliminary or later stage based on the current market scenario and expected business growth. Fundraising acts are a significant resource that underpins the growth of NBFC startup.
NBFC’s must ensure the right allocation of funds in each of its segments to attain the goal of financial stability. The agenda of business funding for NBFCs should be carried on a regular basis since it is a never-ending process.
Non-Banking Financial Companies are inefficient to raise money at lower rates like banks from RBI. Thus, they end up raising funds at a higher interest which further proportionally increase the hurdle rate to maintain Net Interest Margin (NIM) between 1 to 3%. It impels NBFC’s to seek for alternative strategies like Public Bond Issuance, External Commercial Borrowing and so on.
Things to consider while raising funds for NBFCs
There are two measures that one has to take in the process of business funding for NBFC’s which are as follows:
- Evaluate the mismatch between assets and liabilities;
- Minimize the mismatch in assets and liabilities.
In case of NBFC’s, the assets refer to the investments made by NBFC for working as a financing organization such as debt, equity and structured products whereas, the liabilities means amounts owed by the parties that have supplied the money to NBFC to carry out the financial activities.
Sources of business funding for NBFCs
Non-Banking Financial Companies can raise funds through various sources with deposits; some of them include:
- Long term loans at low-interest rates– Once NBFC creates an amount required for deployment in its course of operations, it can apply for a long term loan from the bank. It is beneficial for NBFC’s as banks lend at much lower interest rates owing to the nature of CASA deposits. Such type of loans can be secured or unsecured through Government Securities and its repayment can be made in a structured or bullet schedule. NBFC must record the repayment of long term loans in the Balance Sheet along with the asset section. NBFC’s must have a good credit rating to raise a large sum of funds at competitive interest rates.
- Foreign Direct Investment (FDI)– One of the best funding options for NBFC is foreign investment. In 1991, the era of post-liberalization in the Indian economy, a tremendous increase of foreign investors in the NBFC was perceived. Recently, up to 100%, foreign investment is permitted under the automatic route in FDI. Thus, foreign investors don’t require approval from RBI or FIPB and invest directly in NBFC’s.
- Issue Commercial Paper for small-term loans– Non-Banking Financial Companies can raise the required funds by issuing Commercial Paper. It is a short term unsecured Promissory Note issued by the financial Companies that have tenure of 3 to 12 months. NBFC’s with a minimum net worth of INR100 crores are eligible to list Commercial Papers as per Reserve Bank of India.
- Issue Bonds– NBFC’s can avail considerable money at the lowest costs by issuing Bonds. It is a common practice that helps to reduce the rate on the sources of funds. The coupon rate on the Bonds is selected to reflect the rating profile of NBFC. The maturity profile of Bonds corresponds to the repayment of interest schedules made by the NBFC’s. Bonds can also be issued to the retail investors, which is a huge advantage for NBFC’s during Bond placement.
- Securitization of loans– NBFC’s have raised INR 2.36 lakh crore between the period of October 2018 and September 2019 by selling their loans in the market through Securitization. HFC’s and NBFC’s heavily rely upon Securitization as an effective tool to manage liquidity, raise funds and correct ALM mismatch.
NBFCs that can avail automatic route in FDI
Non-Banking Financial Companies that offer the following services can have an access to the automatic route in FDI:
- Merchant Banking
- Asset Management
- Portfolio Management Services
- Stock Broking
- Venture Capital
- Custodian Services
- Leasing & Finance
- Housing Finance
- Credit Card Business
- Financial Consultancy
- Micro and Rural Credit
- Non-fund based activities
- Investment Advisory Services
- Forex Broking
- Credit Rating
- Money Changing Activities
The Government has introduced new FDI norms for NBFC’s to accelerate Non-Banking Financial sector. It has eliminated the minimum capitalization norms, which is yet another boon for NBFC’s.
The rapid increase of Foreign Director Investments will be highly beneficial for the NBFC Business Model due to easier and faster sanction of funds at reasonable interest rates.