By Parry Singh
According to the Standing Committee on Finance report, India’s growth engine, the MSMEs, face an oversize credit gap of around Rs 20-25 lakh crores. A credit gap refers to the difference between the demand for the credit and its supply from the formal channels. In fact, the ACCA report highlights that this credit gap has been worsening over the last five years. Furthermore, over 80% of the MSMEs have no access to formal financing.
The micro, small, and medium enterprises (MSME) sector is key to nurturing economic development, inspiring entrepreneurship, creating employment, and encouraging financial inclusion in our resource-constrained economy. However, the MSME sector continues to be burdened with financial holdups, with a lack of convergence of availability, accessibility, and affordability of credit.
NBFCs regulated by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), have emerged as a key source of credit for micro, small, and medium-sized enterprises (MSMEs). The share of NBFCs in the total credit extended to the economy grew from 16.4 per cent in December 2022 to 29.1 per cent in February 2023, according to a report by the RBI.
Furthermore, the future for NBFC’s looks promising. Research and Markets indicates that with a promising future ahead, NBFC’s are projected to expand at a CAGR of 18.5 per cent between 2021 and 2026.
The Significance of NBFCs in Facilitating Universal Credit Access
NBFCs play a crucial role in ensuring widespread access to credit by employing strategic thinking and specialized services. They have developed various business models tailored to meet the specific needs of their segmented customer base, establishing efficient distribution and sales channels in the process.
To accurately assess the creditworthiness of MSMEs and expedite loan approvals, NBFCs have implemented credit evaluation procedures and enhanced their risk management capabilities. This creates an additional incentive for MSMEs to seek timely financing through official credit channels.
In addition to credit loans, NBFCs offer all-inclusive product packages that help client retention and promote consumer loyalty. By offering non-financial support services alongside credit facilities, NBFCs upraise customer service standards, resulting in portfolio expansion. This progress, reinforced by the balance sheet lending approach, allows NBFCs to further boost their borrowing and lending capacities.
NBFCs can customize their product offerings by leveraging machine learning techniques and data analytics to meet the specific requirements of their customers. This flexibility is principally valuable for small-ticket loans, which MSMEs often seek for rapid cash inflow. Moreover, NBFCs provide a range of other products, including small company mortgage loans, loans against card receivables, hypothecation loans, e-commerce loans, and loans against property, in addition to working capital and term loans.
NBFCs employ innovative credit evaluation techniques, granting them a higher tolerance for financing invoices issued by MSMEs. Consequently, MSMEs gain access to increased working capital liquidity, ensuring smooth business operations.
Digitalization has played a key role in the evolution of NBFCs. Online NBFCs have developed dynamic underwriting models and digitized their lending procedures. This allows them to cater to the unbanked MSMEs using tools such as eKYC, e-signatures, and Aadhaar-based verification. By using technologies like chatbots, cloud computing, AI, and machine learning, NBFCs fast-track dealings, thereby improving the overall client experience.
Supply Chain Financing (SCF) has emerged as a valuable service provided by NBFCs to bridge the credit gap for MSMEs engaged in supplying products to corporations. By digitizing the supply chain ecosystem, NBFCs offer SCF finance, either through in-house credit solutions or by adopting external technological solutions under the “Software as a Service” model. This enables MSMEs to leverage their business connections with larger corporations to meet their working capital requirements.
The concept of co-lending, endorsed by the RBI, encourages collaboration between banks and registered NBFCs to offer competitive loans to MSMEs operating in priority sectors. Leveraging the wider reach and more affordable bank funding costs of NBFCs, this initiative has improved the flow of credit to underserved and unserved industries.
While it is still a lengthy stretch to close the MSME credit gap completely, the duty for developing digital tools and strategies that leverage the digital footprints and ecosystems of MSMEs lies with start-ups and the innovation ecosystem. Nonetheless, both online and offline NBFCs deserve recognition for expanding access to credit in the financial system and reaching the fringes of the economy. Notably, NBFCs have also exhibited resilience and continued growth notwithstanding economic slowdowns and challenges with an average annual growth rate of 22 percent during their initial stages.
The author is Mr. Parry Singh, Founder & CEO, Red Fort Capital, and the views expressed in this article are his own