A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of the immovable property. A non-banking institution which is a company and has the principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner is also a non-banking financial company (Residuary non-banking company).
Importance of Venture Funding in NBFC
Any NBFC startup that is registered with the RBI needs to raise money to achieve its business goal. NBFC is consistently one of the most well-liked industries for investors since, when managed with technology and big data, company risk is reduced to 5%. When a venture capitalist begins investing a firm at the SEED stage, startup stage, or later stage, the financing strategy is based on the present market environment and the founders’ expectations for business growth.
Funding and fundraising are the main resources that assist the development of a company in the current NBFC industry. It is crucial to make sure that the appropriate amount of funding is allocated to each business segment in order for a startup to succeed. The fundraising schedule must.
Things to take into account when raising money for NBFCs
There are two actions that must be taken in the business finance process for NBFCs, and they are as follows:
- Determine whether assets and liabilities are out of balance;
- Reduce the disparity between assets and liabilities.
Sources of business funding for NBFCs
Non-Banking Financial Companies (NBFCs) can raise money from a variety of sources via deposits, some of which include:
- Long-term loans with low-interest rates: Once an NBFC has the money needed for operations, it can apply to the bank for a long-term loan. Due to the nature of CASA deposits, banks lend money to NBFCs at significantly cheaper interest rates. Such loans can be structured or repaid in a bullet schedule, and they can be secured or unsecured by using government securities. Long-term loan repayments must be reported by NBFC in the balance sheet’s asset column as well. For NBFCs to raise a sizable amount, their creditworthiness is required.
- Foreign Direct Investment (FDI): One of the best sources of finance for NBFCs is foreign direct investment (FDI). An enormous rise in foreign investors in NBFCs was noticed in 1991, the post-liberalization era in the Indian economy. Recently, the automatic path in FDI has allowed up to 100% foreign investment. As a result, foreign investors can participate directly in NBFCs without needing RBI or FIPB authorization.
- Publish commercial paper to fund short-term debts: Commercial paper can be issued by Non-Banking Financial Companies to raise the necessary funds. It is a short-term, unsecured promissory note with a tenor of three to twelve months, issued by financial companies. According to the Reserve Bank of India, NBFCs can list commercial papers if their net value is at least INR 100 crores.
- Issue Bonds: By issuing Bonds, NBFCs can get significant funding at the lowest prices. It is a customary practice that lowers the rate on the funding sources. The bond’s coupon rate was chosen to suit the NBFC’s rating profile. The bond maturity profile is in line with the NBFCs’ interest payback schedules. The ability to issue bonds to retail investors gives NBFCs a significant edge during the bond placement process.
- Loan securitization: Between October 2018 and September 2019, NBFCs raised INR 2.36 lakh crore by securitizing and selling their loans in the market. Securitization is a key technique used by HFCs and NBFCs to manage liquidity, increase capital, and reduce risk.
NBFCs that are eligible for the automatic route in FDI
- Retail Banking
- Asset Control
- Services for Portfolio Management
- Market Trading
- Investment Capital
- Keeping Services
- Financing & Leasing
- Mortgage Financing
- Credit Card Industry
- Consultancy in Finance
- Rural and Microcredit
- Non-financial endeavors
- Services for investment advice
- Currency Trading
- Credit Score
- Money-Changing Operations
Asset Liability Committees overseeing assets and liability in Nonbank financial institutions (NBFCs)
The management of the organization’s liquidity and interest rate risk would be the ALCO’s main duty. These committees are typically headed by the CXOs of the firm to monitor expenses that could balloon out of control and affect profitability, particularly in a bear market.
The function of the ALCO
- Balance sheet risk-return planning, interest rate risk management, and liquidity risk management are all included.
- Calculation of the basic interest rate and item cost for loans and advances.
- Deciding on a desirable maturity profile and future-ready asset and liabilities mix.
- Establishing an interest rate stance and selecting a future interest rate risk management strategy.
- Examining the funding strategy.
Liquidation – Treasury Operations
The three divisions of treasury operations are the front, middle, and back offices. The institution’s Treasury Front Office serves as the central clearing house for coordinating, managing, and controlling market risks. Additionally, it offers investment assistance for the assets and liabilities produced by regular business operations at an NBFC. All dealers actively involved in daily trading operations are required to abide by the regulatory rules of conduct established by FEDAI, FIMMDA, and other organizations. The dealers must also keep track of the Internal Stop Loss Limit.
The back office makes sure that every transaction is successfully executed. Furthermore, a crucial control to ensure precise risk exposure identification is the prompt settlement of all dealing accounts. An on-site tracking department and value-added support are also provided by the mid-office.