RBI Regulations Governing NBFC Funding

1. Regulatory Framework

The RBI governs NBFCs under the Reserve Bank of India Act, 1934 and the Companies Act, 2013. As part of the regulatory framework, the RBI mandates that NBFCs must hold a valid license to operate and adhere to various compliance norms related to capital adequacy, asset classification, and provisioning norms.

2. Funding Sources

Since NBFCs cannot accept CASA deposits, they primarily rely on the following funding sources:

• Public Deposits: NBFCs can accept fixed deposits from the public, provided they adhere to the prescribed regulations and maintain a minimum credit rating.
• Bank Loans: Many NBFCs raise funds through loans from banks and financial institutions.
• Foreign Investments: Post-liberalization, the NBFC sector has seen significant interest from foreign investors.

Permitted Business Activities for NBFCs

The RBI specifies certain business activities that are permissible for NBFCs. These include:

• Loans and Advances: Providing credit to individuals and businesses.
• Investment in Shares and Securities: Buying and selling financial instruments.
• Hire-Purchase and Leasing: Facilitating asset acquisition through hire-purchase agreements or leasing.
• Insurance Business: If registered under applicable laws.

However, activities like agriculture-related financing, ordinary trading of goods, and construction or sale of immovable property are not included.

Key Considerations for Raising Funds in NBFCs

When it comes to funding, NBFCs face unique challenges. Here are some key points to keep in mind:

1. Asset-Liability Management

A crucial aspect of funding is managing the mismatch between assets and liabilities. For NBFCs, assets typically include investments made in equity, debt, and structured products, while liabilities refer to the amounts owed to lenders or depositors. Proper asset-liability management ensures liquidity and financial stability.

2. Regulatory Compliance

NBFCs must comply with various regulations set by the RBI, including capital adequacy ratios, risk management frameworks, and reporting requirements. Non-compliance can lead to penalties or even revocation of their license.

3. Alternative Funding Strategies

Given the limitations on deposit acceptance, NBFCs must explore innovative funding strategies. This includes partnerships, securitization, and tapping into foreign direct investment (FDI).

Foreign Investment in NBFCs

The influx of foreign capital has significantly transformed the NBFC landscape in India. Here are the key aspects:

1. Automatic Route for FDI

Under the Foreign Direct Investment (FDI) policy, foreign investment in NBFCs is permitted under the automatic route, which means that no prior approval from the Foreign Investment Promotion Board (FIPB) or the RBI is needed for investments.

2. Permitted Activities for FDI

Foreign investment is allowed in various non-banking financial services, including:

• Merchant Banking
• Underwriting
• Portfolio Management
• Stock Broking
• Asset Management
• Housing Finance

3. No Minimum Capitalization Norms

As of 2016, foreign investments in NBFCs are allowed without any minimum capitalization requirements, making it more attractive for foreign investors.