Non-Banking Financial Companies, or NBFCs, have become one of the most influential pillars of India’s financial system. They lend where banks hesitate, operate in markets that banks often overlook, and support millions of customers and businesses. Whether it’s micro-loans, SME credit, vehicle financing, gold loans, consumer durable loans, or infrastructure support—NBFCs play a bigger role today than ever before.

To understand NBFCs completely, you need clarity on two major areas:

1. How NBFCs raise funds, manage them, and stay profitable
   
2. How NBFC takeovers work and what RBI expects during the process
   

This guide brings both topics together- in full detail, exactly as written by the original author but rewritten in an expert, conversational way that’s search-friendly and clear to understand.

Why NBFC Funding Works Differently Than Banks?

One thing sets NBFCs apart: they cannot accept CASA deposits (Current Account Savings Account). Only banks with RBI permission can raise low-cost public deposits.

Because NBFCs lack this advantage:

• They borrow at higher interest rates
• Their cost of funds is significantly higher
• Their margins are tighter
• They must be smarter with risk and liquidity

Most NBFCs borrow at rates above what banks themselves offer on deposits (usually 4–6 percent). Despite this, they still need to maintain a Net Interest Margin (NIM) of roughly 1–3 percent, which is the difference between the interest they earn from lending and the interest they pay on borrowed funds.

So where do NBFCs get their funding from? Let’s go deep.

Primary Funding Sources for NBFCs (Explained in Full Detail)

NBFCs raise funds from banks, investors, capital markets, long-term loans, bonds, debentures, and short-term instruments. Let’s break each one down thoroughly.

1. Bank Finance to NBFCs

Banks are the largest lenders to NBFCs.

They offer:

• Term loans
• Working capital lines
• Cash credit facilities
• Overdraft limits

According to RBI data, banks extended nearly ₹1.9 lakh crore to the NBFC sector in just one year (2018–19), marking almost 40% growth.

For NBFCs, bank loans are attractive because:

• Banks can lend at relatively lower interest rates
• Banks have access to cheaper funds through CASA
• NBFCs can borrow in bulk (large ticket sizes)

However, NBFCs need:

• A strong credit rating
• Solid financials
• A clean track record
• Low NPAs

Only then they can obtain large loans at competitive rates.

2. Private Equity (PE) and Venture Capital (VC)

Investors love NBFCs for a simple reason: they grow fast.

When banks struggled with non-performing assets (NPAs), private equity and venture capital firms started investing in:

• NBFCs
• Housing finance companies
• Small finance banks
• Microfinance institutions
• Fintech lenders

Reasons investors prefer NBFCs:

• High demand for credit
• Underserved markets
• Flexibility in lending
• Strong growth potential

Many NBFCs (especially in fintech, microfinance, gold loans, and consumer lending) have raised multiple rounds of funding from global investors.

3. Long-Term Loans from Banks

NBFCs often take large, long-term loans from banks for consistent operations.

These loans may be:

• Secured – backed by assets
• Unsecured – depending on credit strength

Repayment structures can be:

• Bullet repayment – paid at the end
• Structured repayment – EMI-style or customized

A strong credit rating helps negotiate better terms.

4. Bonds and Debentures

Many NBFCs raise long-term money from the capital market by issuing:

• Secured bonds
• Unsecured bonds
• Non-convertible debentures (NCDs)
• Tax-free bonds (especially infrastructure-focused NBFCs)

Key details:

• Coupon rate depends on NBFC’s credit rating
• Rates are typically higher than government securities
• Tenure matches the maturity of assets

Retail and institutional investors often invest heavily in NBFC bonds.

5. Commercial Papers (CPs) – Short-Term Funding

When NBFCs need short-term funds, they issue Commercial Papers.

These are:

• Unsecured promissory notes
• Maturity between 3 to 12 months
• Used for short-term liquidity
• Issued at a discount, redeemed at face value

NBFCs rely on CPs to fill temporary funding gaps.

How NBFCs Measure Fundraising Efficiency

Raising money is one thing. Using it wisely is another. Two major aspects help NBFCs maintain financial health.

1. Asset–Liability Mismatch (ALM)

NBFCs must ensure that:

• The money they borrow doesn’t mature before
• The money they lend starts generating returns

If outflows come before inflows, the NBFC may run out of cash.

ALM management ensures:

• Liquidity safety
• Stability of operations
• Controlled risk
• Better financial planning

2. Net Interest Margin (NIM)

NIM = Interest earned from borrowers – Interest paid to lenders

Since NBFCs borrow at higher rates than banks, maintaining NIM is crucial.

How NBFCs Manage Funds Internally

Two major departments handle fundraising and fund deployment.

1. Rupee Resources Department

Responsible for:

• Raising short-term and long-term funds
• Maintaining liquidity
• Negotiating with banks and investors
• Ensuring no shortage of capital

2. Treasury Department

Responsible for:

• Deploying funds
• Managing investments
• Monitoring interest rates
• Ensuring perfect ALM
• Managing market risks
• Using tools like VaR for risk analysis

The Treasury ensures that every rupee raised is used wisely.

Major Risks NBFCs Must Watch Closely

NBFCs track several high-impact risks:

1. Liquidity Risk

Inability to liquidate assets to meet obligations.

2. Interest Rate Risk

Fluctuating interest rates reduce margins.

3. Foreign Exchange Risk

Currency movements can cause losses (especially in global borrowings).

4. Equity Price Risk

Market fluctuations can reduce investment value.

NBFCs use:

• Value at Risk (VaR)
• Loss Given Default (LGD)
• Strong IT tools
• Real-time dashboards

…to stay ahead of these risks.

Role of Asset-Liability Committee (ALCO)

Every NBFC has an ALCO, typically led by CXOs.

ALCO handles:

• Liquidity management
• Pricing strategy
• Risk-return decisions
• Maturity structure of assets and liabilities
• Base rate setting
• Market trend analysis

It is the most important risk-management committee inside an NBFC.

Treasury Operations: Front, Mid, and Back Office

NBFCs divide treasury into three clear units:

1. Front Office

• Active trading
• Market interactions
• Risk-taking within limits

2. Mid Office

• Monitors risk
• Ensures front office stays within limits
• Independent analysis

3. Back Office

• Settlement
• Accounting
• Compliance
• Reconciliation

This structure maintains checks and balances across the organization.

Understanding NBFC Takeovers in India

A takeover is simply one NBFC gaining control of another NBFC.

Only an NBFC can acquire another NBFC.

Two companies are involved:

• Target Company – being acquired
• Acquirer Company – acquiring

Types of NBFC Takeovers

1. Friendly Takeover

Mutual agreement between both companies.

2. Hostile Takeover

The acquirer takes control without consent.

Benefits of NBFC Takeovers

• Greater market share
• Higher revenue
• Reduced competition
• Expanded network
• Economies of scale
• Better operational synergy

Challenges in Takeovers

• Hidden liabilities
• Conflicts in management
• Cultural mismatch
• Compliance delays
• Integration difficulties

When Does RBI Approval Become Mandatory?

RBI approval is needed when:

• 26% or more shareholding changes
• 30% or more board members change
• Control or management changes

How to Apply for RBI Approval

The acquirer must submit:

• Details of proposed directors
• Shareholding pattern
• Source of funds
• Business plan

The application goes to the RBI Regional Office.

Approval usually takes 3–4 months.

Public Notice Requirement

Before final transfer:

• Issue notice in 1 national and 1 local newspaper
• Minimum 30 days before the takeover

This maintains transparency for creditors, employees, and stakeholders.

Step-by-Step NBFC Takeover Procedure (Full Detailed Breakdown)

Here’s the complete process:

1. Signing the Memorandum of Understanding (MOU)
   Outlines terms and responsibilities.
   
2. Board Meetings
   Both companies approve the takeover plan.
   
3. Public Notice
   Published in newspapers for objections.
   
4. Share Transfer Agreement
   Legal agreement to transfer shares.
   
5. NOC from Creditors
   Ensures no creditor objects to the takeover.
   
6. Valuation of Company
   A CA or merchant banker evaluates the NBFC’s assets.
   
7. Transfer of Assets and Liabilities
   Acquirer takes control.
   
8. Intimation to RBI
   The final update after takeover completion.

Conclusion

NBFCs fuel India’s economic engine by offering flexible credit where banks often fall short. Their long-term success depends on efficient fundraising, disciplined risk management, and strategic expansion – including mergers and takeovers when the timing is right. A well-managed NBFC with a strong treasury, an alert ALCO, and a strict compliance framework can scale quickly while staying aligned with RBI’s expectations.

This is where Habinx Compliance LLP becomes a valuable partner. With services covering company registration, GST and tax filing, trademark registration, accounting, legal documentation, and startup consultation, Habinx simplifies the compliance journey for businesses and financial institutions. Their team ensures that all registrations, filings, and regulatory requirements are handled accurately, allowing NBFCs to focus on growth instead of paperwork.

If your NBFC is planning to expand, raise capital, or undergo a takeover, partnering with a trusted compliance expert like Habinx Compliance LLP can make the entire process smoother and fully RBI-compliant.

Contact Habinx Compliance LLP:
📧 info@habinxcompliance.com
📞 +91 95111 17743

FAQs

1. What are the primary sources of funding for an NBFC in India?

NBFCs typically raise funds through bank loans, private equity, long-term borrowings, bonds and debentures, and short-term instruments like commercial papers. Because they cannot use CASA deposits, they rely heavily on external borrowing to maintain liquidity and support lending operations.

2. Why do NBFCs have a higher cost of funds compared to banks?

Banks enjoy low-cost deposits through current and savings accounts (CASA), but NBFCs are not allowed to accept these deposits. This forces NBFCs to borrow at higher interest rates from banks, investors, and the market, increasing their overall cost of funds.

3. What is Asset-Liability Management (ALM) in NBFCs?

ALM is the process of matching the timing of cash inflows (from loans and investments) with cash outflows (borrowings and liabilities). Effective ALM ensures that an NBFC has enough liquidity to meet obligations and prevents financial stress due to mismatched maturity profiles.

4. What is the importance of ALCO in NBFC operations?

The Asset-Liability Committee (ALCO) monitors liquidity, sets loan pricing, manages interest rate risk, and ensures the correct maturity structure of assets and liabilities. A strong ALCO helps an NBFC maintain financial stability and regulatory compliance.

5. When is RBI approval required for an NBFC takeover?

RBI approval is mandatory if there is a change in control, a change in 26% or more of shareholding, or a change in more than 30% of the board of directors. The acquiring NBFC must submit details of directors, shareholders, and funding sources to RBI for review.

6. What is the complete process of an NBFC takeover?

The takeover process includes signing an MOU, holding board meetings, publishing a public notice, executing a share transfer agreement, obtaining creditor NOCs, completing valuation, transferring assets, and finally intimating RBI. The process typically takes 3–4 months.

7. How do NBFCs manage risks related to funding and investments?

NBFCs monitor risks such as liquidity risk, interest rate risk, equity price risk, and forex risk. Tools like Value at Risk (VaR), Loss Given Default (LGD), and strong IT systems help evaluate financial exposure and maintain stability.

8. How can Habinx Compliance LLP help NBFCs with regulatory and operational requirements?

Habinx Compliance LLP assists NBFCs with company registration, GST and tax filing, accounting, trademark registration, legal documentation, and complete compliance support. They also guide NBFCs through takeover procedures, RBI filings, and regulatory processes.

Contact: info@habinxcompliance.com | +91 95111 17743