Non
Banking Finance Companies (NBFCs) are one of the important entities in the
financial sector. The general factors of
NBFCs business success lies in their cost effective delivery model, sector
focused approach, faster delivery, last mile connectivity, prompt action and
efficiency.
In
the corporate finance sector, the prime areas of NBFC lending involves promoter
funding, funding against shares, subordinated debts, senior debts, short term
debt etc.
Sources
of funds for on-lending business to an NBFC are promoters funding, bank finance,
public deposits, commercial papers, debentures, inter corporate deposits etc.
where bank finance forms one of the
major sources. There are several restrictions on use of bank funds by NBFC for
on-lending like use of such funds for investment into shares, debentures,
unsecured loans, inter-corporate deposits, loans & advances to
subsidiaries/group companies etc.
Recently,
in two of transactions (debt funding) encountered, it was analysed that while
the transactions could not pass the due diligence and guidelines of the bank,
these same transactions were later on found to be present in the asset book of
one of the NBFCs presented to the bank for financing.
This
is one of the reasons I thought to discuss the NBFC financing. Does it mean
that some NBFCs consider those transactions which are not able to pass through
the banks regular due diligence/guidelines?
Under
the corporate finance segment, the NBFCs get major space in lending on short
term basis with prompt delivery and efficiency especially in circumstances
where funds are required on very short notice. Apart from fulfilling the
financing needs against shares, these NBFCs also get space in unsecured/subordinated
lending. The rate of interest & transaction cost of NBFC finance under
corporate segment is also generally on higher side as compared to banking channels.
It appears that unless the time or non-acceptability of general banking covenants,
are the key to the transaction (eligible for direct bank finance), the
transaction may not be attract towards NBFC.
With
the above description, the emphasis which can be derived is that bank finance
to NBFCs (especially having major corporate finance segment) is a critical
financing segment and it appears that reputation of NBFC/promoter group and their
financial strength becomes one of the most important factors of due diligence
apart from strong financials, credit rating and compliance with regulatory guidelines
by the NBFCs.
Wish you all a very Happy New Year 2015.
