Funding in NBFC

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What is RBI Regulations for funding in NBFC?

NBFCs (Non-Banking Financial Companies) as the name suggests, are not banking companies. They do not rely on CASA (Current Account Savings Account) deposits for raising funds. As CASA deposits are only meant for banks, wherein the banks are provided with licenses by the RBI in order to accept monies from the public. NBFCs do not have those luxuries, it means, the NBFCs needs to look for alternate sources of the money supply, which are higher than the deposits taken by banks, where the interest rate offered is between 4%-6%.

What are the permitted business activities for NBFC?

A Non-Banking Financial Company (NBFC) is a company which carries on the business of loans and advances, acquisition of shares, bonds, stock, insurance business or hire-purchase, but does not include any institution whose principal business objective is agriculture or agriculture allied activity,, purchase or sale of any goods (other than securities) ordinary business activity or providing any services and sale/purchase/construction of immovable property.

The financial institutions capable of raising money supply at a low rate like banks and end up raising funds at a higher interest rate. This causes NBFCs to seek for alternative strategies for raising funds in order to generate a higher return.

The Key Points to keep in mind while raising funds in NBFC?

  • Evaluating the mismatch between assets & liabilities; and
  • Minimizing the mismatch in assets and Liabilities.

In case of NBFCs, working as a financing organization, Assetsare the investments made (equity/debt/structured products). while liabilities are the amounts owed to parties that have supplied the monies for the financing activities.

NBFCs can raise funds from various sources. One of the best option to raise fund is from foreign investment.

After the liberalization of the Indian economy in 1991, there has been witnessed a significant interest of foreign investors in the Indian NBFC sectors. A Non-Banking Financial Company (NBFC) is a company engaged in the business of financing but not including any institution whose principal business objective is agriculture or agriculture allied activity, ordinary business activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

Foreign investment in NBFC sector is permitted under the automatic route as per the FDI policy

  • The automatic route is one where no approval from Foreign Investment Promotion Board (FIPB) or RBI approval is needed before making the proposed investment. Up to 100%, foreign investment is permitted without the approval of FIPB under the automatic
  • All foreign transactions are required to routed only through entities licensed by the RBI as per the regulations framed under FEMA.
  • A Foreign investment which is allowed under automatic route only in the non-banking financial service activities are as follows:
  • Merchant Banking, Underwriting, Portfolio Management Services, Stock Broking, Asset Management, Venture Capital, Custodian Services, Factoring
  • Leasing & Finance, Housing Finance, Credit Card Business, Micro Credit, Rural Credit, Non-fund based activities, Investment Advisory Services, Financial Consultancy, Forex Broking, Credit Rating Agencies, Money Changing Business, etc.
  • FDI in such NBFC’s is allowed without any minimum capitalization norms after 2016.