By Abhay Bhutada, Founder & Chairman – Abhay Bhutada Foundation
For years, commercial banks have dominated the lending space, including lending to Micro, Medium and Small Enterprises (MSMEs). But times have changed and so have the needs and demands of a modern-day MSME. These emerging businesses don’t fit into the moulds of traditional lending, they need quick loan disbursals, easy and flexible repayment facilities, and non-collateralised loans.
While the requirements have changed, the lending space is yet to match its pace. The Indian lending industry is still challenged with a lack of access to adequate finance, high levels of scrutiny by traditional lenders, lack of collateral, etc., which have created a huge lending gap for MSMEs.
According to a report, out of over 64 million MSMEs in India, only 14 per cent have access to credit. The report also stated the current credit gap to be an astounding $530 billion in the MSME sector, which is alarming given the major contribution MSMEs have in the country’s GDP and economic growth.
Non-Banking Financial Companies (NBFCs) are emerging as an important player in bridging the credit gap for MSMEs with their unique offerings and technology-based products.
Here’s how NBFCs are making a difference in the MSME sector:
Strengths of NBFCs over traditional lending institutions
While the banking industry is present across the country, their traditional lending practices limit their ability to serve the last-mile population. Banks require collateral and a proven credit history, which excludes many MSMEs. NBFCs play a crucial role here by specialising in lending and providing last-mile financial services. Due to a wider regulatory framework, NBFCs can operate in a broader range of activities and innovations than banks. They have greater risk-taking ability, reaching consumer categories that banks often underserved. Despite having more resources, banks cannot offer the same range of services as NBFCs due to regulatory limitations. As a result, NBFCs have become financial service providers for last-mile customers by offering specialised services with a better understanding of their needs.
How NBFCs bridge the lending gap for MSMEs
Specialised NBFCs employ strategic thinking to cater to the demands of their segmented customer base through tailor-made products, efficient distribution channels, and risk evaluation procedures. They offer product packages that include non-financial services to promote customer loyalty and retention, increase asset size, and expand their portfolio. Using machine learning and data analytics, they personalise their product offerings including business loans, quick loans, and supply chain financing. NBFCs digitise their lending cycles and use innovative credit evaluation systems to improve credit flow to priority sectors at competitive rates.
The advent of new co-lending models combining traditional banks with NBFCs are also providing loans to MSMEs based on priority sectors at affordable cost. This has boosted the flow of credit to unserved and underserved industries by benefiting from NBFCs’ versatile business models and lower cost of funding from banks. Additionally, NBFCs are better positioned to leverage the large digital footprint of the Indian population with their dynamic underwriting models. This has allowed NBFCs to offer their services with digital technologies like e-signature, eKYC/ Aadhaar-based verification, etc.
NBFCs and digital SME lending
Digital NBFCs are leveraging technology to make credit more accessible to underserved customers in India. They leverage alternate data sets and innovative credit underwriting approaches to offer customised products with faster turnaround times, making them a more suitable option for MSME borrowers.
Ecosystem-based lending is another way digital lenders are bridging the MSME credit gap. By partnering with digital platforms like Amazon and Google Pay, they can leverage available information about MSMEs and offer customised lending. Although there is room for innovation, these digital NBFCs are playing an essential role in extending credit to the underserved and unbanked populations of India.
In order to bridge the credit gap in the MSME sector, we need a dynamic multi-channel approach, complete with digital backing and vernacular access. While the NBFCs are leveraging their large network of specialists, branches and executives to make last-mile borrowing more accessible, more attention is needed to close the credit gap. Going forward, NBFCs need to further expand their footprint, identify more gaps in lending, curate better products and continue to refine their technology to ensure the best lending experience for the MSME sector.
