Indian companies are increasingly seeking funding through non-banking channels, with almost half of the resources raised in FY25 originating from equity markets, bonds, and Non-Banking Financial Company (NBFC) loans. This shift is driven by several factors, including strong equity market performance, cautious bank lending, and improved corporate balance sheets. While the total flow of financial resources has seen a modest increase, the demand for bank credit has declined.

Drivers of the Shift

Several factors are contributing to this trend:

• Strong Equity Market Performance: A robust stock market allows companies to raise capital through equity offerings at better valuations. Fundraising through block deals and qualified institutional placements (QIPs) has been active. In FY25, India Inc. raised over ₹42,000 crore through QIPs.
• Cautious Bank Lending: Banks have become more risk-averse due to concerns about asset quality and regulatory scrutiny.
• Improved Corporate Balance Sheets: Many Indian companies have deleveraged their balance sheets, making them more attractive to investors in the equity and bond markets.
• RBI Rate Cuts: Rate cuts by the Reserve Bank of India (RBI) have enabled companies to access long-term funds from the debt capital market at cheaper rates. The RBI has maintained a steady securitization stance since the 2021 revamp, and SEBI's mutual fund rules have also played a role.
• Diversification: Companies are also looking to diversify their funding sources beyond traditional bank loans to reduce their reliance on a single source of capital.

Alternative Funding Options

Indian companies are exploring various alternative funding routes:

• Equity Markets: Raising capital through initial public offerings (IPOs), follow-on public offerings (FPOs), and QIPs.
• Bond Markets: Issuing corporate bonds to raise debt capital from investors.
• NBFCs: Obtaining loans from non-banking financial companies, which often have more flexible lending criteria than banks.
• Asset-Backed Securities (ABS): Securitization of assets to raise funds, as seen in Reliance's recent ₹210 billion deal. This method ring-fences operating cash flows to reduce funding costs and diversify beyond bank lines and vanilla bonds.
• Venture Capital and Private Equity: Investments from venture capital and private equity firms, particularly for startups and high-growth companies.
• Crowdfunding: Raising funds from a large number of individuals through online platforms.
• Angel Investors: Securing funding from angel investors who provide capital and mentorship to early-stage startups.
• Government Grants and Incentives: Availing of financial support from the Indian government or state governments, often aimed at specific sectors or developmental projects.
• Revenue-Based Financing (RBF): Obtaining capital in exchange for a share of future revenues.
• Corporate Venture Capital (CVC): Investments made by large companies in startups to gain access to new technologies and markets.

Impact and Implications

The increasing reliance on non-bank funding has several implications:

• Reduced Dependence on Banks: Companies are becoming less reliant on traditional bank loans, which can reduce their vulnerability to changes in bank lending policies.
• Lower Cost of Capital: Alternative funding sources can sometimes offer lower costs of capital than bank loans, particularly for companies with strong credit ratings.
• Increased Investment Opportunities: The growth of alternative funding channels provides more investment opportunities for individual and institutional investors.
• Growth of the NBFC Sector: The NBFC sector is playing an increasingly important role in providing credit to Indian companies.
• Innovation in Funding Models: The rise of alternative funding is fostering innovation in funding models, such as revenue-based financing and peer-to-peer lending.

Challenges and Considerations

While non-bank funding offers several benefits, there are also some challenges to consider:

• Regulatory Framework: The regulatory framework for some alternative funding sources, such as crowdfunding and peer-to-peer lending, is still evolving.
• Risk Assessment: Investors need to carefully assess the risks associated with investing in non-bank funding instruments.
• Market Volatility: Equity and bond markets can be volatile, which can impact the cost and availability of funding.

Overall, the shift towards non-bank funding reflects the evolving financial landscape in India. As the Indian economy continues to grow, alternative funding sources are likely to play an increasingly important role in meeting the funding needs of Indian companies.