Base Erosion and Profit Shifting (BEPS) Services

Overview of NBFC Funding

Non-Banking Financial Companies (NBFCs) are a vital part of India’s financial system, providing credit to underserved sectors like SMEs, startups, rural populations, and self-employed individuals.

Funding is the backbone of an NBFC’s business model, directly impacting lending capacity, profitability, liquidity, and sustainability.

Since NBFCs cannot freely accept demand deposits, they rely on bank borrowings, capital markets, securitization, and equity funding.

Eligibility Criteria for Raising Funds in NBFCs

The ability of an NBFC to raise funds is governed by its regulatory standing, financial health, and compliance track record. Only NBFCs holding a valid certificate of registration issued by RBI are permitted to raise funds legally. Any borrowing or capital infusion by an unregistered entity is treated as a violation of RBI regulations.

A minimum level of Net Owned Funds (NOF) is mandatory. Currently, newly registered NBFCs must maintain a minimum NOF of ₹10 crore, while certain legacy NBFCs continue to operate with ₹2 crore, subject to RBI transition norms. NOF acts as a cushion against losses and provides comfort to lenders and investors.

Credit rating plays a critical role in determining funding access. RBI-recognized credit ratings are compulsory for raising funds through instruments such as Non-Convertible Debentures (NCDs), Commercial Papers (CPs), and securitization transactions. A stronger rating translates into lower borrowing costs and wider investor participation.

Equally important is the NBFC’s compliance history. Entities with timely RBI filings, clean audit reports, and no regulatory penalties find it significantly easier to access funding. Systemically Important NBFCs (asset size ≥ ₹500 crore) enjoy broader funding avenues but are also subject to stricter prudential norms and disclosures.

Types of Funding Sources for NBFCs

NBFCs can raise funds through a diversified mix of equity, debt, hybrid instruments, and structured finance mechanisms. A balanced funding strategy helps reduce liquidity risk and dependency on any single source.

3.1 Equity Funding

Equity funding strengthens the capital base and improves CRAR.

• Promoter equity infusion (initial funding source)
• Private equity and venture capital investments
• IPO, rights issue, and preferential allotment
• No repayment obligation but ownership dilution

3.2 Debt Funding

Debt is the most widely used funding source for NBFCs.

• Bank loans (term loan, cash credit, overdraft)
• Non-Convertible Debentures (NCDs)
• Commercial Papers (CPs) for short-term funding
• External Commercial Borrowings (ECBs)
• Refinance support from SIDBI, NHB, MUDRA

3.3 Hybrid Funding

Combination of equity and debt instruments.

• Convertible debentures
• Preference shares
• Mezzanine financing
• Flexible repayment structure

3.4 Structured Finance & Securitization

Helps improve liquidity and reduce balance sheet risk.

• Securitization of loan portfolios
• Direct assignment to banks
• Pass Through Certificates (PTCs)
• Transfers credit risk to investors

Advantages of Funding in NBFCs

Adequate funding plays a crucial role in strengthening NBFC operations and ensuring long-term sustainability.

• Enables expansion of lending operations
• Helps diversify loan portfolios and enter new markets
• Improves liquidity management and cash flow stability
• Ensures timely servicing of liabilities
• Enhances credibility with banks and institutional investors
• Improves market reputation and investor confidence
• Reduces concentration risk through diversified funding sources
• Increases resilience during market volatility
• Supports compliance with RBI prudential norms
• Encourages innovation through digital and fintech platforms
• Improves company valuation during equity fundraising

Requirements for Funding in NBFCs

Before raising funds, NBFCs must meet key regulatory, financial, and operational requirements to ensure credibility and compliance.

• Valid RBI Registration Certificate
• Audited Financial Statements
• Valid Credit Rating
• Adequate Net Owned Funds (NOF)
• Well-defined Business Plan
• Robust Loan Portfolio Data
• Strong Corporate Governance Framework
• Documented AML/KYC Policies

In addition, lenders and investors evaluate the NBFC’s overall financial strength and management quality before approving funding.

• Asset quality and loan performance
• Non-Performing Asset (NPA) levels
• Capital adequacy ratio
• Management capability and track record

Process of Raising Funds in NBFCs

Step 1: Assessment of Funding Needs

Identify whether funds are required for expansion, refinancing, or working capital.

Step 2: Selection of Funding Source

Choose the most suitable funding instrument such as equity, debt, or structured finance.

Step 3: Documentation Preparation

• Financial statements
• Business projections
• Compliance records

Step 4: Due Diligence

Lenders or investors conduct detailed checks on:

• Regulatory compliance
• Asset quality
• Corporate governance

Step 5: Negotiation & Agreement

Commercial terms are finalized and formal agreements are executed.

Step 6: Fund Disbursement

Funds are released as per agreed terms.

Step 7: Post-Funding Compliance

• Repayment schedule adherence
• Regulatory reporting
• Ongoing disclosures

Regulatory Framework Governing NBFC Funding

NBFC funding is governed by multiple laws and regulators. RBI regulates borrowing limits, CRAR, ALM norms, and exposure limits. The Companies Act, 2013 governs equity and debt issuance. SEBI regulations apply to listed instruments, while FEMA governs foreign investments and borrowings. Taxation of funding instruments is governed by the Income Tax Act.

Challenges in NBFC Funding

NBFCs face several structural and market-driven challenges while raising funds, especially in a highly regulated environment.

• Higher cost of funds compared to banks
• Strong dependency on credit ratings for market access
• Limited access to capital during economic downturns
• Regulatory caps and compliance restrictions
• Liquidity mismatches between assets and liabilities
• Market volatility impacting funding availability

Sector-specific risks and external factors further impact investor confidence and funding flexibility.

• Impact of past crises like IL&FS and DHFL
• Increased scrutiny on governance and asset quality
• Exchange rate risks in foreign funding
• Compliance with FEMA regulations for overseas borrowings

Relevance of NBFC Funding Today

The NBFC liquidity crisis highlighted the importance of diversified and compliant funding strategies. RBI’s Scale-Based Regulation (SBR) framework has further strengthened supervision and improved sector resilience.

• Emphasis on diversified funding sources
• Stronger regulatory oversight under RBI
• Improved risk management and compliance standards

In the current financial landscape, NBFCs are adopting innovative funding approaches to sustain growth and remain competitive.

• Increased use of securitization
• Adoption of co-lending models with banks
• Partnerships with fintech companies
• Access to overseas funding opportunities
• Enhanced role in financial inclusion
• Better ability to withstand economic shocks

NBFC Funding

NBFCs cannot freely accept public deposits like banks, except deposit-taking NBFCs with RBI approval. Common funding sources include bank loans, NCDs, CPs, securitization, equity, and ECBs. Foreign funding requires compliance with FEMA regulations. Credit rating is crucial for accessing debt markets, and minimum CRAR of 15% must be maintained. Funding compliance is mandatory, and violations can attract RBI penalties and operational restrictions.

Funding is the cornerstone of an NBFC’s business model. In a highly regulated and competitive environment, access to diversified, compliant, and cost-effective funding determines long-term success. NBFCs that combine strong governance, regulatory discipline, and innovative funding strategies are best positioned to grow sustainably and contribute meaningfully to India’s financial ecosystem.

Frequently Asked Questions