Structured Financing in India
In the corporate finance evolution, structured financing has become a very effective tool for Indian businesses. Particularly in the current dynamic economy, where conventional loans might not always be suitable to address the sophisticated funding requirements of businesses, structured finance comes to the rescue by offering tailor-made capital solutions.
Let’s understand what structured financing means, how it has developed globally and locally, and what types are most relevant for Indian businesses today.
Understanding Structured Finance
Structured finance refers to complex financial instruments designed to meet specific funding needs, particularly for large-scale borrowers or businesses with unique capital requirements. These solutions go beyond conventional debt and equity structures and often involve the pooling of assets, risk trenching, and credit enhancement mechanisms.
In India, structured finance is gaining popularity among companies seeking customized solutions that conventional banking products may not be able to provide. Whether it is the management of working capital shortfalls, debt refinancing, or expansion funding, structured finance offers the flexibility and size required in the current market.
Structured Financing Footprints
Structured finance found its roots across the world during the 1970s with the introduction of mortgage-backed securities (MBS) in America. Through this innovation, financial institutions could collect mortgage loans and transform them into tradable securities. As time passed, more complex products like collateralized debt obligations (CDOs) and asset-backed securities (ABS) came into force.
In India, the idea picked up significance during the early 2000s, mainly through securitization in housing finance. As years passed by and NBFCs, fintech's, and alternative platforms of investment gained prominence, structured finance instruments grew to cover such sectors as vehicle loans, SME financing, real estate funding, and infrastructure funding.
Why Structured Finance Matters for Indian Businesses?
Traditional bank financing is often limited by strict collateral requirements and standard repayment terms. Structured financing fills this gap by:
Providing tailored repayment terms
Mitigating risk through credit enhancements
Releasing working capital by tapping asset value
Mobilizing investments from institutional investors such as mutual funds, AIFs, and family offices
Through structured finance, essentially both liquidity and flexibility are introduced, allowing promoters to expand their operations without losing control.
Types of Structured Finance Applicable in the Indian Debt Market
1. Receivables Securitization
In this framework, future cash flows like loan repayment, rental incomes, or invoice receivables are bundled up and sold to investors. It is heavily utilized by NBFCs, housing finance institutions, and fintech lenders for accessing liquidity without shedding their core assets.
Example: An NBFC collects its auto loan receivables and sells them to a special purpose vehicle (SPV), which issues securities to institutional investors.
2. Lease Rental Discounting (LRD)
LRD is extensively utilized in real estate and commercial property finance. Here, the future rental income of a leased commercial property is discounted to advance an upfront loan to the owner of the property.
This product is favored by corporates and developers who wish to earn fixed rental income while retaining ownership of the asset.
3. Loan Against Future Cash Flows
For corporates with long-term contracts, such as EPC businesses, SaaS companies, or service companies, structured finance can provide loans against future earnings or receivables against milestones.
This structure optimizes working capital management while synchronizing repayment against actual inflows.
4. Structured Working Capital Finance
They exceed traditional overdrafts or CC limits. They are structured in alignment with the business's cash conversion cycle and include invoice discounting, vendor finance, and stock funding.
Usually, they involve the employment of hybrid debt forms consisting of term loans, revolving facilities, and credit enhancement for facilitating hassle-free business.
5. Subordinated Debt
This is a hybrid instrument that falls between senior debt and equity. It enables companies to raise capital without diluting ownership while paying fund houses more in terms of returns for taking higher risk.
It's particularly useful during the growth phase or acquisition, where the promoter does not want to dilute equity but still needs significant capital.
6. Credit-Enhanced Bonds
These are non-convertible debentures (NCDs) or other instruments issued with additional credit support, e.g., guarantees from third parties (e.g., banks or government schemes). This enhances the credit profile of the bond, which is attractive to institutional investors.
This structure is best suited for companies with moderate credit ratings who wish to access the debt capital market at competitive interest rates.
The Regulatory Landscape in India
Structured financing in India is regulated primarily by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). With evolving frameworks for securitization, NBFC funding, and bond issuance, the ecosystem is becoming more transparent and investor-friendly.
Moreover, government initiatives like credit guarantee schemes, the SIDBI Fund of Funds, and co-lending models are further boosting the adoption of structured finance products.
Conclusion:
As India's economy becomes more mature, so will its demand for sophisticated financing instruments. Structured financing is just no longer for big corporates, it's now available to mid-cap companies, startups, and even niche sectors like healthcare, infrastructure, and renewable energy.
At Terkar Capital, we collaborate with promoters and CFOs to craft tailored, structured financing solutions that suit their business objectives and risk tolerance. From cash flow mismatch management to raising non-dilutive capital, we offer profound market knowledge and robust institutional connections.
