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In recent times, the financial industry has undergone significant changes and reforms, especially with respect to the funding costs of Non-Banking Financial Companies (NBFCs). The Reserve Bank of India (RBI) has implemented a number of policies to improve the transparency and accountability of the sector, including the introduction of the Liquidity Coverage Ratio (LCR), and guidelines for the adoption of Ind AS accounting standards. However, these measures have also resulted in some unintended consequences, particularly for small NBFCs.
Small NBFCs are those that have a total asset size of less than Rs. 500 cr. unlike larger NBFCs, which have access to a wide range of funding sources, including bank loans, commercial paper, and bonds, small NBFCs typically rely on a few sources of funding, such as loans from banks and financial institutions, and funding from private investors. As a result, they are particularly vulnerable to fluctuations in funding costs.
Following are some factors that impact the funding costs of NBFCs:
Small NBFCs can take several steps to mitigate the impact of higher funding costs. Some of these steps include:
Small NBFCs are facing significant challenges in the current environment, with higher funding costs being a major concern. However, by diversifying funding sources, focusing on building a strong credit rating, embracing technology, building a niche market, maintaining strong relationships with lenders, and maintaining a strong focus on risk management, small NBFCs can mitigate the impact of higher funding costs and remain competitive. While the road ahead may be challenging, small NBFCs that are able to adapt to changing market conditions and adopt a proactive approach to managing their funding costs are likely to emerge as winners in the long run. Ultimately, a focus on building a sustainable business model and delivering value to customers remains key for the success of any NBFC, large or small.
Also Read:Decoding the Growth of NBFCs in IndiaWhat is a Non Banking Financial Company (NBFC)?Non-Banking Financial Institutions: What They Are and How They Work?
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