The quick access to capital, customised solutions and flexibility that allow small businesses to find loan options are some of the major factors attracting Indian micro, small and medium businesses (MSMEs) to non-banking financial companies (NBFCs) in terms of loan disbursals, repayment options, and collateral requirements, said Deepak Aggarwal, Co-founder, Moneyboxx, in an interview with BW Businessworld.
Aggarwal stated that NBFCs are often known for their faster loan processing and disbursal times compared to traditional banks. MSMEs, which often have time-sensitive funding requirements, are attracted to NBFCs due to their ability to fulfill the major requirements of MSMEs.
He, however, added that with digital lending becoming increasingly popular, in recent years due to its convenience and accessibility for borrowers, it presents certain risks for NBFCs such as accurate assessment of the creditworthiness of the borrowers, lack of IT infrastructure, cyber security measures, and disaster recovery plans among others. Edited excerpts:
Tell us about Moneyboxx and what are the beyond-lending impact initiatives offered by the company.
Presently, we operate through 72 branches in six states, namely Rajasthan, Madhya Pradesh, Haryana, Punjab, Chhattisgarh and Uttar Pradesh. Our mission is to empower micro-entrepreneurs by providing unsecured and secured business loans in the range of Rs 70,000 to 10 lakh across vital sectors like livestock, kirana, retail traders, micro-manufacturing and more.
The company is also undertaking sustainable farming efforts, which will significantly increase borrowers' agricultural revenue. These activities include the free distribution and upkeep of fruit-bearing plants to dairy farmers or borrowers with agricultural land through CSR tie-ups and internal contributions.
About 55 per cent of the company's borrowers are women, while approximately 33 per cent are new to credit consumers. The majority of their borrowers, around 66 per cent, operate in the livestock segment.
How have NBFCs disrupted the lending landscape for MSMEs, challenging traditional banks?
NBFCs are the preferred choice for many MSMEs due to their ability to offer customised financing solutions, quicker loan approvals and seamless customer experience. NBFCs can process and disburse loans much faster than traditional lenders. Lower turnaround time is crucial for MSMEs that often need quick access to working capital. Since NBFCs require minimal documentation from borrowers because they assess creditworthiness differently, the underwriting process becomes more efficient due to preset industry-specific policies.
In India, NBFCs have played a pivotal role in fostering the growth and progress of MSMEs as well as entrepreneurs. Especially in smaller towns and cities, where traditional banks may not adequately meet the demand for accessible business loans, NBFCs have risen to the occasion to fill this void. Through their provision of collateral-free loans, simplified procedures, swift disbursals and cashless transactions, NBFCs have brought about a transformative change in credit accessibility, empowering MSMEs and entrepreneurs in these underserved regions.
What is the recent growth trend in lending to the MSMEs sector by NBFCs in India?
The MSME sector is a significant contributor to the Indian economy, generating employment opportunities and fostering entrepreneurship. However, traditional banks have historically been cautious in lending to this sector due to perceived higher risks associated with small businesses. NBFCs, on the other hand, have shown remarkable growth in lending to MSMEs for several reasons:
NBFCs are often more agile and flexible than traditional banks, enabling them to respond quickly to the time-sensitive demands and urgent capital requirements of MSMEs. This responsiveness is crucial for small businesses that often face fluctuating cash flows and need quick access to funds.
NBFCs may have a deeper understanding of the MSME segment, allowing them to assess credit risk more accurately. They may use alternative data sources and technology-driven underwriting models to evaluate creditworthiness beyond traditional metrics.
NBFCs, especially those with a social mission, may focus on financial inclusion and serving underserved areas and segments. This aligns with the government's initiatives to promote financial inclusion and support MSMEs.
What are the key factors attracting MSMEs to NBFCs in terms of loan disbursals, repayment options, and collateral requirements?
A report by TransUnion CIBIL and Sidbi showed that more MSMEs are preferring NBFCs for their financing needs. NBFCs have been actively extending credit to MSMEs, contributing to overall financial inclusion and economic growth. According to the provisional data from RBI, NBFC loans to MSMEs had increased by 14.6 per cent in FY22 with more than Rs 1.75 lakh crore extended vis-a-vis 2.8 per cent growth with around Rs 1.55 lakh crore loans in FY21. 1 NBFCs are reshaping the financial landscape by adapting to the evolving needs of dynamic MSME enterprises.
NBFCs may be more lenient in their collateral requirements compared to traditional banks. Some NBFCs offer collateral-free loans or accept alternative forms of collateral, making it easier for MSMEs with limited assets to secure funding. Many NBFCs have adopted technology-driven processes, such as digital loan applications and underwriting, which simplify the loan application process for MSMEs. This technology adoption also contributes to faster approvals and disbursals.
NBFCs may consider alternative credit assessment criteria beyond traditional financial statements. This approach allows them to evaluate the creditworthiness of MSMEs based on other factors, such as business performance, industry trends, and future growth potential.
What are the challenges NBFCs currently facing to make a mark in India?
With digital lending becoming increasingly popular, in recent years due to its convenience and accessibility for borrowers, it presents certain risks for NBFCs such as accurate assessment of the creditworthiness of the borrowers, lack of IT infrastructure, cyber security measures and disaster recovery plans. NBFCs also face challenges like compliance regulations related to lending practices, KYC, anti-money laundering and economic factors like changes in interest rates, industry-specific trends and geopolitical events that affect the operations.
Can you explain common hurdles for small businesses in securing loans, challenges in catering for the underserved segment and how Moneyboxx is tackling them?
Severely underserved segment Microfinance borrowers at the bottom of the pyramid, where the average loan amount is less than Rs 50,000, are adequately served by over 230 lenders (including MFIs, NBFCs and Banks). However, such a small amount of finance is inadequate for the borrowers for acquiring income-generating assets or working capital and making a significant change in their income profile. Secured loans of over Rs 10 lakh are also aggressively pursued by banks and NBFCs.
However, the ‘missing middle’ segment, unsecured/secured business loans of Rs 1 to 10 lakh, is severely underserved by lenders (banks and NBFCs) due to problems in the assessment of income in the absence of ITR/GST/banking/books of accounts, inadequate credit history, imperfect collateral, and minimal digital footprint.
Fintech lenders are also unable to serve this segment due to a lack of adequate data and minimal digital footprint, and addressing this segment requires on-ground presence for understanding the borrowers, their cashflows and effective underwriting and collection efficiency.
The underserved ‘missing middle’ segment presents a huge market opportunity. The market for residential property-backed secured MSME lending is estimated at Rs 22 trillion as per Crisil Research. Given the huge unmet credit demand and addressable market of Rs 22 trillion, micro-enterprise lending presents a huge opportunity.
While competition from large banks and NBFCs, and any changes in regulation could be potential threats, the segment has high entry barriers, and the policy and regulatory framework continues to be supportive given the thrust of the government on promoting financial inclusion.
Moneyboxx has served this segment using a relationship-assisted branch model and leveraging technology with fully digital processes and proven underwriting and scalability. The company follows a ‘phygital’ business model with an on-ground presence for a better understanding of customers while leveraging technology to the fullest extent in digitising processes and applying IT in decision-making, reporting and analytics.
To shed light on the challenges in securing business loans, small businesses run on cash transactions to avoid paying taxes. Yet, without a balance sheet, organised lenders won’t provide funding. Therefore, ensure all transactions are recorded in a balance sheet, which also helps highlight the business growth over the years.
Small entrepreneurs also need to create personal balance sheets backed by the requisite tax documents, especially when building fixed assets. Lenders are more willing to lend if collateral is available as they are assured of recovering their money via the sale of collateral in case of a payment default. As most business funding comes in the form of secured loans, it is essential to have collateral that can be pledged to raise funds.
A poor credit score can end in a loan application’s rejection since it reflects badly on one’s repayment capacity. Unsettled or outstanding debts and late payment of EMIs are some reasons for a poor credit score. Managing finances well and making timely repayments can lead to an improved credit score, ensuring a loan application is approved at competitive interest rates.
How are NBFCs reshaping the financial landscape by catering to the evolving needs of dynamic MSME enterprises?
NBFCs are reshaping the financial landscape by providing faster loan approval processes and flexible credit assessment for MSMEs. They offer quicker access to funds with tailored repayment options, catering to the unique needs of these dynamic enterprises. However, NBFCs also face challenges in compliance management, funding, and risk management. Despite the challenges, the credit profiles of Indian banks and NBFCs are expected to remain strong, with a positive outlook for the future. The evolving role of NBFCs is expected to drive financial inclusion and support the growth of the MSME sector, which is vital to India's economy.
Fintech partnerships can also be a crucial factor in enhancing the capabilities of NBFCs. Collaborations between fintech companies and traditional financial institutions can lead to the development of new products and services, expanding the reach of NBFCs, and improving the overall customer experience. For example, multiple NBFCs have now collaborated with fintech platforms to provide supply chain financing to their customers.