NPA Funding by NBFC Companies

What is NPA Funding by NBFC?

NPA funding by an NBFC refers to a loan offered to an NPA borrower to close their stressed loans. In this way, the NPA loan will be taken over by an NBFC, and a fresh repayment tenor and moratorium period will be offered to the borrower.

Depending on the structure of the transaction, funding may be used for:

• Closing an NPA loan account
• Funding a One-Time Settlement (OTS)
• Taking over an NPA account from an existing lender
• Repaying overdues of stressed accounts
• Consolidating multiple financial liabilities
• Borrowers with low credit scores
• Post-NPA working capital support

NPA funding by NBFC companies may be considered based on the overall strength of the proposal rather than relying only on the borrower’s past credit history.

They may evaluate:

• Value and quality of available collateral
• Current business performance
• Cash flow and repayment capacity
• Existing liabilities
• Reason for the account becoming an NPA
• NPA outstanding amount
• OTS Settlement or closure proposal
• Future business prospects
• Promoter or borrower contribution

Can an NBFC Fund an NPA Account?

Yes, NPA funding may be available through NBFCs or other alternative financing sources, depending on the specific case and the lender’s policy.

However, it is important to understand that not every NBFC finances NPA accounts. NPA cases generally require a detailed assessment because the borrower already has a stressed credit history.

The availability of funding depends on factors such as the security offered, amount required, repayment strategy, business viability and proposed exit mechanism.

The focus may shift toward the present value of the collateral, business viability, repayment strategy and overall financial proposal, rather than considering the credit score alone.

Types of NPA Funding Solutions by NBFC

NPA funding can take different forms depending on the borrower’s requirement.

1. NPA Loan Takeover

In an NPA loan takeover, a new financier may take over the existing loan liability, subject to the lender’s assessment and applicable terms.

The new financier may pay the existing lender and take over the underlying security and repayment obligation as agreed.

2. One-Time Settlement (OTS) Funding

A borrower may negotiate a One-Time Settlement (OTS) with the existing bank or financial institution.

Once the settlement amount is agreed, financing may be explored to arrange the required funds for completing the settlement.

3. Funding for NPA Closure

Some borrowers require funding specifically to close their NPA account and release or regularise the underlying security.

The financing structure depends on the settlement amount, collateral value, repayment capacity and lender requirements.

4. Post-NPA Working Capital Funding

After resolving an NPA, a business may require fresh funds to restart operations, execute orders or meet working capital requirements.

Subject to eligibility, financing may be explored based on the business’s current financial position and prospects.

Is Collateral Required for NPA Funding?

In many NPA funding cases, collateral plays an important role in the lender’s assessment and gives confidence to fund. Moreover, secured lending is preferable over unsecured lending, and larger loan amounts require collateral to secure the loan.

Depending on the financing structure, acceptable security may include:

• Residential property
• Commercial property
• Industrial property
• Land
• Other acceptable assets

The amount of funding that can be considered may depend significantly on the quality and value of the collateral.

Documents Required by an NBFC Company for NPA Funding

The exact documentation varies from case to case. However, lenders may request:

• KYC documents
• Company or business registration documents
• Existing loan statements
• NPA account details
• Bank statements
• Financial statements
• Income-tax returns
• OTS proposal or settlement letter, if applicable
• Property documents
• Details of existing liabilities
• Business projections or cash-flow information

Providing complete and accurate information can help the lender evaluate the proposal more efficiently.

Difference between traditional banks & NBFC in funding an NPA

Traditional Banks: Banks have strict lending parameters based on the borrower’s credit history and credit score. Generally, they do not fund a case with poor repayment history or lower credit scores. They follow a simple rule: the higher the credit score and the cleaner the history, the stronger the chances of approval. Apart from this, high scores also help in getting larger loan amounts.

NBFC: Not all NBFC’s, but a few of them, offer loans for borrowers with poor credit history or low credit score. They judge the proposal based on reasons for NPA (not willful) and current business strength for repayment, including the valuation of collateral offered. They evaluate the case based on the current status, bypassing the past credit history. For them, the higher the business strength to repay the loan, the better the chances of approval.