Non-Banking Financial Corporations (NBFCs): Innovative Fundraising Strategies and Risk Management

Non-Banking Financial Corporations (NBFCs) play a crucial role in the financial landscape by providing a wide array of financial services. However, the efficiency and success of these organizations largely depend on their ability to raise and deploy funds effectively while managing associated risks. In this article, we explore the fundraising strategies of NBFCs and the essential risk management practices. We will also discuss how non-banking financial corporations like the Aavishkaar group are pioneering innovative approaches to overcome challenges and enhance profitability.

The Primary Goals of Fundraising

The effective raising of funds is a critical component of NBFCs' operations. Key objectives include:

Minimizing Asset-to-Liability Mismatch: NBFCs strive to balance their assets and liabilities to ensure stability and liquidity. Ensuring Risk Management: Minimizing exposure to risks such as liquidity, interest rate, foreign exchange, and price risks associated with equity portfolios. Optimizing Returns: Deploying funds effectively to maximize returns while managing associated risks and maintaining strong Net Interest Margins (NIM) of 1-3 percent.

The Asset-to-Liability Mismatch

Assets and liabilities play a pivotal role in the operations of NBFCs. Assets include equity, debt, and structured products, while liabilities encompass the funds raised from various sources. The rupee resource department is responsible for managing these elements, ensuring that there is a minimal mismatch between assets and liabilities to avoid liquidity and solvency risks.

Risk Management Considerations

Several significant risk variables are managed by the Treasury and Rupee Resources departments:

Liquidity Risk: The risk of investments being difficult to sell or provide to third parties without incurring a loss. This is a critical consideration for NBFCs to ensure they maintain sufficient liquidity to meet operational needs. Interest Rate Risk: Fluctuations in interest rates impact the Net Interest Margin and the value of the NBFCs net worth. Effective interest rate management is crucial for maintaining a stable NIM. Foreign Exchange Risk (Forex): Currency rate fluctuations, particularly during events like demonetization, can pose significant risks, especially for entities with open positions in both spot and forward markets. Price Risk in Equities: The risk of loss on equity portfolios, both public and private, and the NBFCs equity investments. VaR (Value at Risk) models are often used to evaluate these risks and make necessary adjustments.

Source of NBFC Funding

Effective fundraising is vital for NBFCs to maintain liquidity and fund their operations. Various sources and strategies are employed, including:

Long-Term Fundraising

Long-term funds are secured through term loans, often obtained from banks. These loans are typically based on G-secs (Government Securities) and can be structured for bullet or instalment repayment. With strong credit ratings, NBFCs can borrow significant amounts at lower interest rates.

Bond Issuance

Bonds are a popular method for raising long-term funds. The coupon rate is selected to match the NBFC's credit rating while also offering a higher yield than G-secs. Tax-free bonds in sectors like infrastructure and roads are particularly advantageous for NBFCs.

Short-Term Fundraising

Short-term financing is achieved through commercial papers (CPs). CPs are unsecured promissory notes issued for a brief period, often with a term of 3 to 12 months. They are a flexible and cost-effective way for NBFCs to raise funds.

Innovative Fundraising and Risk Management

Despite the challenges, innovative fundraising strategies and risk management practices are crucial for NBFCs to thrive. Organizations like the Aavishkaar group are pioneering new approaches to address limitations and create impactful solutions. By embracing strategic methodologies, they not only overcome barriers but also drive sustainable growth.

Strategic Approaches and Impact

The Aavishkaar group uses a strategic approach to identify and capitalize on limitations as opportunities for creating a positive impact. This methodology not only mitigates risks but also drives the organization towards a more sustainable and resilient future.

Conclusion: Effective fundraising and robust risk management are essential for the success of NBFCs. By minimizing mismatch, optimizing returns, and adopting innovative strategies, NBFCs can navigate the complexities of the financial landscape and continue to provide valuable financial services to their clients.