Fund-rais­ing for NBFCs

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:

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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.


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.

To­day, they have 3 pri­mary sources of funds: For long term fund needs, they get term loans from banks, af­ter de­cid­ing on the amount of funds to be de­ployed in nor­mal op­er­a­tions. Bonds are an­other com­mon route to re­duce the in­ter­est rate on the sources of funds. For short term fund needs, they raise funds through com­mer­cial paper (CPs), which are short term un­se­cured prom­is­sory notes with a ten­ure of 3 months to 12 months.

Ramesh Iyer, vice chair­man & MD, Mahin­dra Fi­nance, one of In­dia’s lead­ing NBFCs with a ru­ral fo­cus, says the com­pany raises funds through mul­ti­ple bor­row­ing sources with a di­ver­si­fied set of in­vestor base. “Banks have al­ways been a sig­nif­i­cant source of bor­row­ing for us. Dur­ing the years with debt cap­i­tal mar­kets ma­tur­ing, the

share of is­suance of NCDs has risen. Apart from these two ma­jor sources, we also raise funds through fixed de­posits and public is­suance of deben­tures as well as short term funds through com­mer­cial paper and in­ter cor­po­rate de­posits. We also have a mech­a­nism of rais­ing funds through the se­cu­ri­ti­za­tion route as well. In ad­di­tion, we are ex­plor­ing fund­ing from off­shore mar­ket through masala bonds and ECB route,” he ex­plains.

For Shri­ram City Union Fi­nance, one of the coun­try’s premier fi­nan­cial ser­vices com­pany spe­cial­iz­ing in re­tail fi­nance, bank bor­row­ings con­sti­tute the high­est share of re­sources, and were at 59% of the fund­ing mix as of June 2018. Ac­cord­ing to V. Lak­shmi Narasimhan, ED of the com­pany, while de­posits are in­te­gral to its plans as a re­source base, “their share in the mix has been de­clin­ing. We have been mak­ing the most op­por­tune use of the money mar­ket, how­ever.”


As re­gards meet­ing long term fund re­quire­ments and the nat­u­ral pref­er­ence of NBFCs for term loans from banks and the op­tion of bonds, Lak­shmi Narasimhan says there are mer­its in tap­ping both av­enues. “While bank bor­row­ings cur­rently com­prise a ma­jor source of funds for us, we have floated bonds in the past and would con­tinue to ex­plore this route sub­ject to the pric­ing be­ing ac­cept­able to us,” says he.

Iyer too says Mahin­dra Fi­nance uses a mix of both these sources for long term funds along with fixed de­posits de­pend­ing on mar­ket liq­uid­ity and yield. “How­ever for pe­ri­ods higher than 5 years, is­suance of non-con­vert­ible deben­tures is more preva­lent,” he adds.

Bank bor­row­ings com­prise ap­prox­i­mately 30% to 35% of the over­all bor­row­ings of the com­pany while deben­tures (ex­clud­ing public is­sue of deben­tures) com­prise ~ 40%. Public is­sue of deben­tures is ~ 5%.


To what ex­tend do they de­pend of CPs?

Iyer says CPs and in­ter cor­po­rate de­posits are more com­monly used as sources of short term fund­ing. Apart from these, the com­pany also has lines avail­able with banks as part of con­sor­tium to avail work­ing cap­i­tal fa­cil­i­ties. “We main­tain a strong ALM pol­icy to main­tain liq­uid­ity. Ap­prox­i­mately 10% to 15% of our over­all bor­row­ings is raised through short term source,” says he.

He adds that the com­pany in gen­eral uses all bor­row­ing sources so as to ben­e­fit from both a healthy mix of in­stru­ments as well as ben­e­fit­ting from its pric­ing. How­ever, these usu­ally does not ex­ceed 2% of the over­all bor­row­ings.

For Shri­ram City Union Fi­nance, as of now, CPs make up around 14% of its li­a­bil­i­ties. How­ever, deben­tures do not make the fit for the com­pany as a short­term fund­ing mode be­cause deben­tures are is­sued for tenors greater than 12 months. As of June 2018, the com­pany does not have any in­ter-cor­po­rate de­posits in its re­source mix.


Iyer main­tains that in­sur­ance com­pa­nies and prov­i­dent/ pen­sion funds have the abil­ity to in­vest for longer term com­pared to other mar­ket par­tic­i­pants. “In­sur­ance sec­tor is one of the mar­ket par­tic­i­pants in NCD place­ments and in the last few years their par­tic­i­pa­tion lev­els have in­creased, and these com­prised ~ 15% of the to­tal bor­row­ings of Mahin­dra Fi­nance. “We raise funds from such in­sti­tu­tions as they are com­pet­i­tive con­sid­er­ing their long term na­ture, which strength­ens ALM,” he adds.

Shri­ram City Union Fi­nance’s bor­row­ings from the in­sur­ance sec­tor are quite in­signif­i­cant at present, be­ing less than 1% of the to­tal li­a­bil­i­ties.

What is the role of ALCO in de­cid­ing the mode of se­cur­ing fund­ing?

Says Lak­shmi Narasimhan: “Our As­set Li­a­bil­ity Man­age­ment Com­mit­tee meets reg­u­larly (and as pre­scribed) to for­mu­late, re­view, mon­i­tor and rec­om­mend poli­cies on in­vest­ment, as­set-li­a­bil­ity man­age­ment, pri­vate place­ment of NCDs, se­cu­ri­ti­za­tion, in­ter­est rate ap­proach and gra­da­tion of risks and other re­lated mat­ters as well as to for­mu­late busi­ness strat­egy in line with the bud­get and to pro­vide a frame­work for as­sess­ing and man­ag­ing li­a­bil­i­ties and as­so­ci­ated risks. Our fi­nance team works closely with and re­ports to the ALCO on all re­source-rais­ing ini­tia­tives.”

Iyer main­tains that the ALCO helps in pro­vid­ing broader ob­jec­tive of rais­ing funds through di­ver­si­fied bor­row­ing sources to re­duce de­pen­dency on any one sin­gle source. The com­pany de­pends on sourc­ing mix on float­ing ver­sus fixed based on busi­ness model. In ad­di­tion, it also guides on ma­tu­rity pro­file of li­a­bil­ity and sourc­ing based on as­set ma­tu­rity mix.


Can NBFCs at­tract PE fund­ing? Is this mode ad­van­ta­geous?

Iyer says usu­ally PE firms in­vest in in­stru­ments which have the abil­ity to pro­vide them higher re­turns than pure debt in­stru­ments. Hence, they largely par­tic­i­pate in struc­tured in­stru­ments / eq­uity. How­ever in event of sur­plus funds avail­able, they par­tic­i­pate by in­vest­ing in bonds/ CPs. But these in­vest­ments com­prise a very small por­tion of the to­tal debt re­quire­ment.

“How­ever,” says he, “they do par­tic­i­pate in en­hanc­ing the cap­i­tal base of the com­pany by in­vest­ing in the eq­uity cap­i­tal thereby en­abling such com­pa­nies to en­hance their lever­age and grow. Fur­ther, they may also par­tic­i­pate in growth op­por­tu­ni­ties which an NBFC may eval­u­ate. PE fund­ing is use­ful for en­ti­ties which are un­able to raise cap­i­tal and whose pro­moter rep­u­ta­tion is weak. The cost of bor­row­ings from PEs shall be higher com­pared to other mar­ket par­tic­i­pants,” he elab­o­rates.

Lak­shmi Narasimhan says NBFCs, in­clud­ing Shri­ram City Union Fi­nance, have at­tracted and con­tinue to at­tract PE fund­ing. “This route of cap­i­tal rais­ing is def­i­nitely mu­tu­ally ad­van­ta­geous for well­run NBFCs like ours since it helps us build up scale and we an of­fer tar­geted re­turns to the in­vestors. Long-term PE in­vestors look for cer­tain min­i­mum re­turns over a set in­vest­ment hori­zon, and we at Shri­ram City Fi­nance would like to be­lieve that we have helped our PE in­vestors add im­mense value to their in­vest­ments placed with us,” says he.


He also ex­plains the sig­nif­i­cance of FDI: “We un­der­stand 100% FDI in NBFCs is per­mit­ted un­der the Au­to­matic Route, sub­ject to sec­tor con­di­tions. There ex­ists a rea­son­able num­ber of prom­i­nent NBFCs ei­ther with sub­stan­tial FDI in them or which op­er­ate as sub­sidiaries of en­ti­ties based out­side In­dia.”

Iyer too says FDI’s can be a sig­nif­i­cant source of fund­ing. How­ever since NBFCs are not el­i­gi­ble to take forex ex­po­sure, such op­tions get lim­ited on ac­count of the con­ver­sion pric­ing risk be­ing trans­ferred to FDIs. “Fur­ther, op­por­tu­ni­ties like masala bonds / ECB which could open up such in­vest­ments get re­duced on ac­count of the in­cre­men­tal cost levied for with­hold­ing tax,” he says.

Ac­cord­ing to him one of the fac­tors that can help NBFCs to at­tract fund­ing from var­i­ous sources is the re­moval/re­duc­tion of the WHT on masala bonds. This, he says, could help in en­hanc­ing funds from for­eign in­vestors. Fur­ther de­vel­op­ing the bond mar­ket will also im­prove fund­ing op­tions. The other fac­tors are strong parent­age, liq­uid­ity back up, rat­ing.


Lak­shmi Narasimhan says it is ad­vis­able for NBFCs to pos­sess a di­ver­si­fied mix of fund­ing in or­der to cope with in­ter­est rate risks and other con­tin­gen­cies. “Well-run NBFCs with longevity, niche po­si­tion­ing, sus­tained prof­itabil­ity, scale and aboveav­er­age as­set qual­ity would al­ways be bet­ter-placed to at­tract fund­ing from mul­ti­ple sources,” says he.

The cost of fund­ing of NBFCs are higher than that of banks. How can they get over this prob­lem apart from us­ing the right rate of lend­ing? Says Lak­shmi Narasimhan: “Fund­ing costs of NBFCs are not or­di­nar­ily com­pa­ra­ble with those of banks since banks will al­ways tend to have ac­cess to cheaper funds be­cause of fac­tors such as the abil­ity to raise de­posits on a much wider scale, open and op­er­ate CASA, main­tain lower cap­i­tal ad­e­quacy re­quire­ments etc. We at Shri­ram City Union Fi­nance have al­ways en­joyed the con­fi­dence of both in­sti­tu­tional and re­tail lenders and de­pos­i­tors, and this, com­bined with pos­i­tive events such as our re­cent credit rat­ing up­grade should en­able us to con­tinue to raise money at ac­cept­able pric­ing lev­els and to con­tinue to de­liver high NIMs, among other key met­rics.”

Says Iyer: “NBFC’s have a nim­ble op­er­at­ing en­vi­ron­ment and are flex­i­ble in cre­at­ing new prod­ucts as per cus­tomers’ re­quire­ments. Such cus­tom­ized prod­ucts put NBFCs in an ad­van­ta­geous po­si­tion to fund en­ti­ties/ prod­ucts. The cus­tomer seg­ments ad­dressed by NBFCs are niche and not ser­viced by many banks due to un­even cash flow and lim­ited credit his­tory.”


The ICRA note had also said it will be chal­leng­ing for NBFCs to raise funds in view of higher bor­row­ing costs and nar­row­ing op­tions.

Iyer re­sponds say­ing his com­pany con­tin­ues to source funds from all av­enues in­clud­ing banks and mar­ket par­tic­i­pants like mu­tual funds, FIs, PFs, cor­po­rates and in­sur­ance com­pa­nies. “Given that the G-Sec rates have gone up partly on ac­count of the pol­icy rates in­creas­ing and also be­cause of gen­eral in­fla­tion­ary trends, we be­lieve that NBFCs shall con­tinue to be among the prime sec­tors to be pre­ferred by such in­vest­ing com­mu­ni­ties given the growth op­por­tu­ni­ties and im­proved pric­ing,” says he.

Says Lak­shmi Narasimhan: “NBFCs will have to con­tend with a higher cost of funds in FY2019, given the cur­rent in­ter­est rate trends. How­ever, we re­it­er­ate that for ef­fi­ciently-man­aged NBFCs, avail­abil­ity of ad­e­quately-priced re­sources should not be dif­fi­cult, even with a growth tar­get of 20% or more.”

Ramesh Iyer main­tains that banks have al­ways been a sig­nif­i­cant source of funds for Mahin­dra Fi­nance, but NCDs too have gain promi­nence

V. Lak­shmi Narasimhan is of the view that fund­ing through the PE route is mu­tu­ally ad­van­ta­geous for the NBFC as well as the PE since it helps build up scale

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