Fundraising is essential for Non-Banking Financial Companies (NBFCs) to thrive in India’s dynamic financial ecosystem. It enables NBFCs to expand their lending capabilities, introduce new products, and maintain economic stability. This guide delves into the significance of fundraising, outlining the various sources and strategies for securing funds, which are crucial for enhancing operational efficiency, product diversification, and financial resilience.
As NBFCs grow increasingly interconnected with the banking sector and play a vital role in serving the unorganized sector and small borrowers, effective fundraising becomes a key driver of their continued expansion and influence on the broader economy.

Significance of Funding for NBFCs

Funding is crucial for the growth and sustainability of Non-Banking Financial Companies (NBFCs), driving their ability to expand, innovate, and remain financially secure. Key aspects of its significance include:

• Business Expansion : Funding enables NBFCs to expand their operations and enter new markets. This expansion could involve launching new financial products, opening branches in underserved areas, or catering to specific customer segments.
• Risk Management: A well-diversified funding base helps NBFCs manage liquidity and credit risk effectively. Depending solely on one source of funding exposes them to potential disruptions if market conditions change.
• Regulatory Compliance: NBFCs must adhere to regulatory requirements set by the RBI and other regulatory bodies. Maintaining appropriate levels of capital and liquidity is crucial to meet these requirements and ensure financial stability.

• Innovation and Technology Adoption: Innovation is key to staying competitive in the financial sector. Funding allows NBFCs to invest in technology and infrastructure, enabling them to offer efficient and customer-friendly services. 

• Customer Confidence : Having a stable funding base enhances customer confidence. It ensures that NBFCs can fulfill their financial commitments and provide uninterrupted services to customers. 

The legal framework for Non-Banking Financial Companies (NBFCs) in India provides significant opportunities for funding while ensuring regulatory oversight. Key aspects include:

• 100% Foreign Investment: Most NBFC operations allow 100% foreign direct investment (FDI) under the automatic route, eliminating the need for prior approval from the RBI or FIPB, making foreign funding an attractive option.
• Scale-Based Regulatory System: From October 2022, NBFCs are classified into four tiers—base, middle, upper, and top—based on size, activity, and risk, introducing a more tailored regulatory approach.
• Capital Adequacy Norms: NBFCs are required to maintain a minimum capital adequacy ratio of at least 15%, comprising Tier I and Tier II capital, to ensure financial soundness.
• RBI’s Scale-Based Regulation: The Reserve Bank of India (RBI) introduced scale-based regulation to strengthen the sector, with regulatory oversight tailored to NBFC growth, activities, and risk levels.