Bangalore: Element Capital Pvt. Ltd (ECPL), an investment banking advisory, is setting up a non-banking financial company (NBFC) to offer debt finance to primarily real estate firms, and other sectors such as small and medium enterprises (SME), a top executive said.
The new entity, Element Finance, will do debt transactions and is in the process of raising around Rs.1,100 crore from wealthy individuals.
“Developers are looking to raise high-cost capital and there is an opportunity in the market,” said Sharik Currimbhoy, chief executive, Element Capital. “We already have Rs.500 crore as commitments, and another Rs.600 crore in process should be done by April.” The capital will be deployed in the coming months.
Currimbhoy, chairman of Element Finance, said the new NBFC had been set up by acquiring the licence of an existing Mumbai-based NBFC instead of applying for a new licence, which is time consuming. He, however, refused to name the NBFC.
NBFCs are in demand at the moment and have offered a lifeline of sorts to many realty firms, particularly smaller developers, as liquidity in the sector remains scarce.
NBFC capital, in the last two years, has been crucial to real estate firms, because unlike bank funds, it can be used for acquiring new land or making land-related payments. It can also be used for general corporate purposes, such as debt repayment, that banks are not allowed to do.
Element Finance will look at transactions sizes of Rs.20 crore to a maximum of Rs.300 crore each. In the real estate sector, it will mostly deploy capital in metros and into residential projects.
Currimbhoy said it is looking at credible developers with project inventory. While the NBFC will cater to different kinds of capital requirement, it will prefer projects that have broken ground and where some pre-sales have happened so that returns are assured.
“We have already identified 3-4 project developments in Mumbai, Pune and Ahmedabad. For now, the focus will be on western India, and next year onwards, we will explore other cities,” he said.
In 2010-12, an estimated Rs.5,000-6,000 crore of lending came into the sector from NBFCs. This year, property analysts expect NBFCs to have contributed around Rs.3,000 crore or more.
Rajeev Bairathi, director, DTZ International Property Advisors, said a few private equity (PE) funds, including foreign funds, have also started their own NBFCs for this flexibility in lending.
“Offshore funds have a number of FDI (foreign direct investment) norms to comply with, that is not the case with NBFCs which are far more flexible,” said Bairathi.
NBFC capital is expensive though, at an interest rate of 18-20% and upwards compared to banks, which lend at 13-14%. PE funds charge 22-28%.
NBFCs are also using interesting deal structures to mitigate risk and raise the upside on some transactions. Element Finance will deploy capital through placement of debt and structured equity. Structured transactions, started by PE firms more than a year ago, involve a debt component included in an equity offering.