Day 25/100 |
#100DaysWithTVS
When you take a home loan from HDFC Bank and a personal loan from Bajaj Finance, it may seem similar with the whole interest rate, credit check, EMIs, the experience is similar. But this surface similarity hides a fundamental structural difference in how NBFCs fund themselves.
NBFC - Non-Banking Financial Company, is registered under companies act and regulated by RBI under RBI act. NBFCs provide financial services including lending and investment. But they cannot accept demand deposits from the public.
Since NBFCs cannot access retail deposits, they assemble their funding from multiple sources.
Source 1 - Bank Loans: NBFCs borrow from banks. Bank loans are the most reliable NBFC funding source. For example Banks take retail deposits at 6% then lend to NBFCs at 8%-9%. Then further NBFCs add their spread and lend to end customers at 12-18%
Source 2 - Non-Convertible Debentures(NCD): NBFCs issue bonds called NDCs in India to institutional investors, insurance companies, provident funds, and HNI.
Source 3 - Commercial Paper: These are short term borrowing, typically 90 days to 1 year. These are issued to mutual funds and institutional investors. CP funding is sensitive, its rates fluctuate with money market conditions.
Source 4 - Securitisation: NBFCs pool their loan portfolio and sell them to banks or mutual funds. NBFC gets immediate cash while transferring credit risk.
Source 5 - External Commercial Borrowings(ECBs): Larger NBFCs like Bajaj finance and Shriram Finance borrow in foreign currency from global investors. This connects Indian NBFCs to global interest rates.
Source 6 - Equity Capital: The minimum capital ratios (15% CRAR) must be maintained by the NBFCs. To expand the loan portfolio they will need to issue equity from time to time (rights issues, QIPs). The cost of this equity is assessed in the capital markets.
Here is a crousel on NBFC and Capital Market connection.
Parth Verma The Valuation School
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