Corporate Finance Segment of NBFCs and Bank Finance

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.