Fund-Raising For NBFCs: An Onerous Task

NBFCs meet their funding requirements from a variety of sources but there are complexities. Ramesh Iyer, MD & CEO, Mahindra Finance, and V. Lakshmi Narasimha, ED, Shriram City Union Finance, explain the modalities:

Rating company ICRA has said in a note recently that non-banking finance companies (NBFCs) would face hardships in raising funds in FY201819 in view of the prevailing higher costs of borrowing and decreasing funding options. It is estimated that NBFCs as a whole would need about ̀ 4000 billion in the fiscal as they eye a growth of 20% in their loan portfolio and ICRA is of the view that the weighted average cost of funds for these entities would increase to about 9.5% in 20182019 compared to 8.4%-8.5% in 2017-2018. They are also facing constraints as banks have put sectoral caps because of various reasons and ICRA said the share of NBFC credit increased to 10.5% of the banking system credit to corporates in March 2018 as compared with 8.7% in March 2017.

Foreign portfolio investors too are shying away because of certain recent developments and this can obviously impact private placement funding to NBFCs.

Another factor is the weakening rupee which is likely to have an adverse effect on prospects of foreign investors.

However, NBFCs have taken up strategic initiatives like improved market presence and effective marketing schemes, better loan products and care for customers, which are likely to improve prospects of capital infusion.

They have some relief as private equity (PE) investments have seen an upswing in the past few years and PE firms provide not just funds for NBFCs, but they are also seen as participants in creating global standards and processes in these organizations.

ALTERNATIVE STRATEGIES

But, NBFCs do not have the ability to raise funds at a low rate like banks, and they are forced to evolve alternative strategies so that the funding they get are deployed in such a manner that it brings in higher returns. However, this is at a cost - they need to take higher risks.