Funding in NBFC

NBFC are companies whose principal business is dealing in financial activities. Though undertaking financial activities, NBFCs are dissimilar to banks as NBFCs cannot accept demand deposits and cannot issue cheques drawn on their own, NBFC also does not form part of the payment and settlement system like banks.

Another important difference between banks and NBFCs is that banks are given permission to accept funds from the public by the Reserve Bank of India. NBFCs do not have such an option. Thus, NBFCs cannot depend on the Current Account Savings Account, which raises the requirement for locating another source of supply for funds for NBFCs.

Why do NBFCs need to raise funds?

Companies need funds to fulfill their daily obligations to run their business efficiently, some of the basic funding requirements are:

• Fulfill everyday operational requirements and support business needs;
• For business expansion, 
• Increasing the standards of business,
• Coping with rising competition in the financial market,
• Developing better products and services to meet the customer’s needs etc.

How can NBFC raise funds?

NBFCs can raise funds in the following ways:

Foreign Funding:

The RBI has liberalized the provisions for foreign investment in the NBFC. As per the provisions, 100% FDI is allowed for other financial services through the automatic route. However, for NBFCs that are not governed by regulators in the financial sector, this will mandatorily require government approval. As per the notification of RBI issued in 2016, the requirement for minimum capitalization norms has also been removed for such investment.

Securitization:

Securitization is the process of pooling loan assets and then selling those to investors. Loan Securitization is a commonly used method to create capital using NBFCs. RBI has addressed the struggle faced by the NBFC in raising funds, as a result of which various norms on securitization for NBFCs were relaxed.

Borrow from other Financial Institutions:

Working capital facilities of NBFCs can be funded by the banks. The term loan facilities of NBFCs can also be covered by the banks. Funds borrowed by NBFC from banks can be secured or unsecured and repayments of funds can be made through a structured schedule.

Bonds:

Issuance of Bonds is a common method to raise funds at low cost by NBFCs. The coupon rate and maturity of Bonds can be selected by NBFCs as per their profile.

As per the data from the Reserve Bank of India, NBFCs are mostly dependent on bank loans. The bank's exposure to NBFCs is vast due to the direct lending mechanism by banks. Fundraising is a crucial matter which must be addressed diligently by NBFCs. The funds must be raised from an appropriate source after reviewing the policies and risks involved. Financial stability must be observed to ensure the appropriate allocation of funds.