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.
Companies need funds to fulfill their daily obligations to run their business efficiently, some of the basic funding requirements are:
NBFCs can raise funds in the following ways:
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 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.
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.