AIF vs Bank vs NBFC-HFC for Real Estate Funding

When a developer asks “who should fund this?”, the honest answer is “it depends on the stage.” Banks, NBFC-HFCs and Category-II AIFs are not competitors offering the same product at different prices — they occupy different rungs of the risk ladder, and each is barred or unsuited from the others’ territory. Here is a neutral comparison.

In short: Banks are cheapest but fund only RERA-registered construction and stabilised assets (never land); NBFC-HFCs are more flexible and fund land through inventory at higher cost; Category-II AIFs are the most expensive and provide mezzanine, last-mile and special-situations capital that the other two won’t. Most projects use a combination, sequenced over the project’s life.

Banks

What they fund: construction finance for RERA-registered projects, lease rental discounting, and refinance of stabilised assets. Not land, TDR or premium — RBI’s Master Circular on Housing Finance prohibits banks from funding a private builder’s land acquisition.

Cost: the lowest — indicatively ~10–12% for construction, ~9–11% for refinance.

Trade-off: the strictest prerequisites (full approvals, RERA, clean title) and the slowest process. Worth waiting for once the project qualifies; useless before it does.

NBFC-HFCs

What they fund: the widest span — land, TDR and premium, construction and inventory. Regulated by RBI/NHB, they face no bar on land lending.

Cost: higher than banks — indicatively ~11–16%, varying by stage and risk.

Trade-off: more flexible on stage, structure and speed than banks, at a premium. The natural home for early-stage and bridge capital that later refinances into a bank facility.

Category-II AIFs

What they fund: the risk capital neither banks nor HFCs will — mezzanine debt between senior debt and equity, last-mile capital for stalled projects, and special situations (acquisitions, partner buyouts, distressed completion).

Cost: the highest — indicatively mid-teens to low-twenties on an IRR basis, often blending a coupon with an equity-linked component.

Trade-off: expensive, but it funds what would otherwise not get funded at all — and it is cheaper than giving away equity. (See structured / AIF finance.)

Side by side

Indicative — terms vary by lender, stage, asset class, location and sponsor.

The real answer: combine and sequence

The framing of “AIF vs bank vs NBFC-HFC” is slightly misleading — the best outcome usually combines them. Fund land via an NBFC-HFC or AIF (banks can’t), bridge into a bank construction facility once approvals land, top up a funding gap with AIF mezzanine if needed, and refinance the stabilised asset with a bank. Each rupee priced to its stage. (The full sequence is in which capital pool for which stage.)

Choosing well over the whole life of a project — not just on day-one rate — is where an independent adviser across all three pools adds the most value. At Finnova, every mandate is CA + ex-banker–led; see real estate funding.

Key takeaways

• Different rungs, not competitors: banks (cheap, construction/refinance only), NBFC-HFCs (flexible, land to inventory), AIFs (expensive, mezzanine/last-mile).
• Banks can’t fund land — that’s NBFC-HFC and AIF territory.
• AIF capital is dearer than debt but cheaper than equity — use it for genuine gaps.
• The best structure combines and sequences all three across the project’s life.

FAQ

Is an NBFC more expensive than a bank for a builder loan? Generally yes — NBFC-HFCs price higher than banks (indicatively ~11–16% vs ~10–12% for construction), but they fund stages banks can’t, like land and premium, and move faster. The efficient structure uses NBFC-HFC capital early and refinances into a bank facility as the project de-risks.

When should a developer use an AIF instead of a bank or NBFC? When you need mezzanine or gap capital above senior-debt LTV, special-situations funding (acquisition, buyout, distressed completion), or last-mile capital for a stalled project — situations banks and HFCs step back from. It’s the most expensive pool but cheaper than diluting equity. See structured finance.

Can I combine a bank loan and an AIF on the same project? Yes — a bank senior facility with an AIF mezzanine layer above it is a common structure. It requires a clean inter-creditor and security arrangement between the two, which is the technical heart of the deal.

Which is fastest to fund? Category-II AIFs are typically the fastest and most flexible, NBFC-HFCs next, and banks the slowest (because of approval and documentation requirements). Speed often justifies a higher early-stage cost if it lets the project start now.