World MSME Day: Decoding Irreplaceable Role Of NBFCs

Just like any business, micro, small, and medium enterprises (MSMEs) need funding to go about their daily operations. Over the years the government has brought big changes to cater to the wants and needs of MSMEs with schemes and guarantees like the emergency credit line guarantee scheme (ECLGS), which has delivered credit to more than 130 lakh MSMEs and the credit guarantee trust for micro and small enterprises (CGTMSE), which provides an additional Rs 2 lakh crore additional credit for micro and small enterprises specifically.  

Notably, many banks have also begun offering loans of various kinds specifically catered to MSMEs. However, an interesting shift has been noticed in the world of MSME financing – more and more MSMEs have been shifting from banks as their primary lender to non-banking finance companies (NBFCs). 

According to data from the Reserve Bank of India (RBI), loans given by NBFCs to MSMEs has increased by 14.6 per cent in FY2022, with around Rs 1.75 lakh crore extended to MSMEs, compared to Rs. 1.55 lakh crore worth of loans in FY21. 

NBFCs have brought in several changes in recent years to better work with MSMEs to make for a truly interdependent relationship. Arun Nayyar, Managing Director and CEO, NeoGrowth said, “Technology and digital innovations” are a driving force behind MSMEs switching to NBFCs for their credit needs. He continues with how NBFCs make use of data science and analysis to make lending decisions, saying that “this helps us extend credit to creditworthy MSMEs by leveraging their digital financial transactions to underwrite them and assess the health of their business.”  

Nayyar added that with the help of data and digital, NBFCs have been able to assess MSMEs using a holistic approach instead of simply relying on credit scores, which has increased financing availability for MSMEs. 

Vishal Suryawanshi, National Head of Retail Credit at Vivriti Capital, emphasised a different feature of NBFCs which makes them an attractive lending option for MSMEs. “By offering limited data and collateral requirements, NBFCs provide a time-efficient lending experience, enabling MSMEs to check their eligibility online and receive funds within 1-2 days,” he said, “This proactive approach is reshaping the lending industry and empowering MSMEs to seize opportunities without the burden of cumbersome procedures.”  

Hardika Shah, Founder and CEO, Kinara Capital further added that there are multiple reasons why NBFCs have become so attractive for MSMEs, "including the approach to credit underwriting, speed of disbursement and repayment options.” She stated that since NBFCs prioritise quick turnaround time, MSMEs are able to access funds promptly and meet their immediate financial needs, “This speed and efficiency in disbursing loans provide MSMEs with the necessary liquidity to seize growth opportunities or address any pressing business requirements.”

But that is not all, NBFCs offer flexible repayment options to MSMEs. This is particularly advantageous for small businesses that may face occasional cash flow challenges. NBFCs have lenient collateral requirements compared to traditional banks, Shah added. 

The digital initiatives undertaken by NBFCs are a huge selling point for why MSMEs prefer them over traditional banks and other lending sources. Nayyar further elaborated on this point, “These institutions excel in providing faster and easier credit access options by leveraging the digital ecosystem and India stack, with a seamless digital customer journey supported by statistical scorecards, NBFCs ensure prompt and convenient lending solutions for MSMEs.” 

Nayyar cited a study and said that the digitally enabled loan process emerged as the primary criterion for MSMEs when choosing a loan provider.

Suryawanshi spoke on similar grounds and mentioned, "The seamless online application processes, digital documentation, and quick loan disbursals offered by NBFCs cater to the time constraints and urgent capital requirements faced by MSMEs” are what differentiate NBFCs from traditional lenders." 

But the question remains on whether NBFCs have been able to serve their purpose of bridging the credit gap faced by MSMEs. “NBFCs have a wide market reach and their deep customer connects enable them to adapt to the requirements of their target segment quickly,” added Nayyar.

However, there are still improvements that the lending systems in India can make to better cater to the needs of MSMEs. Vivriti Capital's Suryawanshi commented on how leveraging the robust technology ecosystem will enhance MSME lending. He argued that initiatives like the account aggregator ecosystem, DigiLocker and India stack would simplify the lending process, “facilitating easy access to credit for entrepreneurs.” 

According to the experts, recognising the evolving dynamics of the economy, such as the rise of exports and urbanisation, will further tailor lending products and services to the evolving needs of MSMEs, fostering their sustained growth.

Meanwhile, Shah said that the expediting of embedded finance can be a game changer. This would allow MSMEs to directly access credit and financial services through the applications and platforms they use for their daily operations, which is more affordable and accessible compared to traditional financial services.  

NBFCs have played a major role in revolutionising the credit lending space for MSMEs; however, there are still things to improve going forward, both on the government front, as well as on the NBFC front.