Funding in NBFC

What are the Pre-Conditions for NBFC Capital Raising in India?

The pre-conditions for NBFC capital raising in India are as follows:

• Must be registered and ensure compliance with the minimum net owned fund norms.
• Ensure updated KYC, ROC, RBI, and annual compliances.
• Must meet the mandated RBI threshold of at least Rs. 10 crores.
• Must maintain a minimum CRAR of 15% on an ongoing basis.
• Ensure there is no material ongoing regulatory, criminal, or major tax litigation.
• Have adequate internal policies for credit, risk, and anti-money laundering.
• Comply with applicable FDI, FEMA, and ECB conditions.

Who Needs to Raise Funding for NBFC?

The list of eligible NBFCs that actively seek and raise funding is as follows:

• Lending & microfinance institutions.
• Asset & infrastructure finance companies.
• Growth-oriented fintech NBFCs & digital lenders.
• Fintech & digital lenders.
• Investment & credit companies.

How to Secure Funding in NBFC?

Have a look at the step-by-step process to secure funding in NBFC is as follows:

1. Step: Determine Funding Requirement
   Funding in NBFCs requires entities to determine funding needs, including loan portfolio expansion, technology upgrades, and compliance with regulatory capital adequacy ratios.


2. Step: Prepare Investor Pitch Deck
   Next, the entities are required to prepare an investor pitch deck and a comprehensive business model to highlight their NBFC's unique selling proposition, NPA management, and loan book quality.


3. Step: Conduct DD on the Company's Finances
   In the next step, the investors and banks conduct thorough due diligence on the company's books of account to ensure financial stability & KYC/ALM compliance.


4. Step: Negotiation of Commercial Terms
   Next, the key financial parameters and commercial terms, including equity dilution and representation on the Board of Directors, are required to be negotiated.


5. Step: Drafting & Vetting of Shareholder Agreement
   Once the terms are agreed upon, it is necessary to ensure the drafting and vetting of the shareholder agreement and the share subscription agreement.


6. Step: Obtain Board & Shareholder Approval
   The next step is to present the funding proposal to the Board of Directors to obtain a shareholder resolution, as mandated under the Companies Act.


7. Step: Receipt of Funds
   Upon execution of all agreements and compliance with the preconditions, the NBFC receives funds in its designated bank account.


8. Step: Ensure Post-Compliance Funding Reporting
   In the next step, the NBFCs must ensure mandatory post-compliance funding reporting (including the Advance Reporting Form and the Single Master Form) with the RBI FIRMS Portal.

Different Types of Debt Funding Options for NBFC

In India, the different types of debt funding options for NBFCs are as follows:

• Equity Funding: Equity funding from promoters, private equity, venture capital, and angel investors helps dilute ownership, thereby improving NBFCs' capital adequacy.
• Debt Funding: Debt funding is a common option for raising funds from banks, NBFCs, and other financial institutions, as well as through bonds and debentures, to further expand their lending portfolios.
• Subordinated Debt: Subordinated debt is unsecured borrowing and is considered part of Tier-II capital under the RBI's capital adequacy norms.
• External Commercial Borrowings: External Commercial Borrowings help raise funds from foreign lenders and provide a larger pool of capital & competitive interest rates, subject to regulatory guidelines.
• Hybrid Instruments: Hybrid instruments, including convertible debentures, preference shares, and perpetual debt instruments, offer funding flexibility, thereby strengthening capital structure in India.