After discussing different sources of fund from the banking system, we shall now concentrate on the different funding options which a Non-Banking Financial Service Company (NBFC) provides to Indian borrowers.
NBFCs provide normal term loan in the form of different products. A few of the important products which are present in the market are:
· Loan Against Property
· Equipment Loan
· Term Loan
· Lease Rent Securitization
· Promoter Funding
3.1 Loan against Property (LAP)
If a business entity or its promoter is having an unencumbered immovable property, against this the NBFC would provide a loan. Generally, the loan amount is 65% of the market value of the property. The document requirement for such type of loan is relatively relaxed compared to the bank. Besides, end use restriction is also relaxed in such cases. In such cases, when the borrower requires funds for certain purpose and within short period of time, it can avail the loan in the form of Loan against Property.
The LAP fund can be used for the following purpose by the borrower:
(i) Purchase of another asset
LAP fund can be used for purchasing another real estate or land . Since banks fund cannot be used for purchase of land, many borrowers in India resort to this product for further purchase of land.
(ii) Bringing in margin money for another loan from the bank
A borrower needs to bring in margin money for any type of loan it takes from the bank. The borrower may not have the margin money in the form of cash. So the borrower or promoter can raise LAP from the NBFC and the same would be injected in the company as margin money. This is explained with the help of an example:
Example
ABC Limited, has a working capital limit of ` 35 crores for which it has to bring in the margin money for working capital to the tune of ` 3 crores. The company does not have cash and bank balance of more than ` 0.25 crores. But the promoter has immovable properties worth ` 5 crores. The promoter would take LAP to the tune of ` 2.75 crores from an NBFC with the company as a co- applicant. Now this
money would be brought in the company by the promoter in the form of either unsecured loan or in the form of equity. Since LAP is given for a longer period i.e. a minimum of 7 years, the cash flow from the business would be sufficient to repay the LAP amount.
(i) Debt Consolidation purpose
LAP is also used for Debt and Security Consolidation purpose. This is explained with the help of the following example.
Example
ABC Private Limited (ABPL) gave a 3000 square feet building located at Thane in Mumbai 10 years back as collateral to a banking facility of ` 20 lacs. At that time the value of the building was ` 18 lacs. Now the value of the building is ` 300 lacs. The overall borrowing has increased by ` 40 lacs. Now the company tells the bank to replace this security with another collateral of ` 80 lacs. However, most of the time the banker would not accept this. Now the company can take LAP of ` 45 lacs against the new collateral and bring own fund of ` 15 lacs and pay off the bank limit. Once the ` 300 lacs collateral is released from the bank, the company would now process the loan application for ` 60 lacs with a new
bank where it would mention upfront that it would provide a collateral of ` 80 lacs. Once this loan is sanctioned, the LAP would be repaid by the borrower. This is known as security consolidation /debt consolidation.
(ii) Promoter Funding
This is another important product which NBFC can give. Due to capital market exposure, banks have restrictions on lending to the capital market. Now, for acquiring another company in the domestic market, bank borrowing cannot happen as it is prohibited by the RBI. So the borrower (acquirer) would approach the NBFC to fund such acquisition in the form of term loan. In such a case, the promoter shares are pledged if the company is listed or unlisted. If the company is unlisted, then apart from these shares, listed shares which promoter or company is holding in its books would also be taken as security.
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