MSME Credit Gap- NBFCs On The Rescue

MSMEs play a critical role in driving economic growth and job creation even though they face financial bottlenecks due to access to credit. Such businesses continue to be a significant driver of economic development by creating an environment conducive to entrepreneurship and financial inclusion. Financial institutions should aim to help these businesses grow and thrive because of the increased economic growth and prosperity brought by MSMEs.

MSMEs and Credit Gap- The Way Forward

Small and medium-sized businesses (MSMEs) in India account for a significant amount of the country’s economic growth. However, these businesses face a colossal credit gap in excess of Rs. 25 lakh crores, as per the latest report from the Standing Committee on Finance. The credit gap has grown substantially over the past five years, and MSMEs have difficulty getting traditional financing.

The various regulatory and institutional constraints prevent banks from serving the last mile. Banks require good credit and collateral from borrowers, which often disqualifies many last-mile borrowers, such as MSME entrepreneurs. NBFCs lend to Indian small and medium-sized enterprises (MSMEs) faster and better by increasing MSME credit. This helps to close the gap between the banking industry and the last mile.

Even though banks have more resources, these constraints limit their service reach. NBFCs present an opportunity for MSME entrepreneurs to work with a regulated financial institution that can take on more risks than a traditional bank. This allows for more innovation and creativity in the services offered to MSMEs.

Rural MSMEs- Into The Fire

The credit gap in rural India is a significant issue because it leaves many businesses without the necessary resources to grow. This gap is caused by several factors, including the high risk for lenders, the lack of good records or collateral, and the lack of reasonable terms from lenders. These factors make it difficult for businesses in rural India to get the credit they need to succeed.

Lenders’ evaluation systems for MSMEs are often poor, as they do not understand how MSMEs operate or spend time getting to know them. To better serve their customers at the last mile and understand their needs, many NBFCs have invested time and effort in understanding the modus operandi of NBFCs.

NBFCs are filling credit gaps by providing customised loans to various customers. They have also improved their assessment and risk management skills, which allows them to assess MSMEs’ creditworthiness more quickly and effectively.

NBFCs have been successful in retaining customers by bundling products together. They offer credit loans and other non-financial assistance. This helps them grow their portfolios by providing better customer service.

Also Read: Are Fintechs Bridging the UAE’s SME Finance Gap?

NBFCs and New Age Technology

NBFCs use machine learning to customise their products to meet the needs of small businesses. This includes loans, receivables, hypothecation loans, and e-commerce loans. In addition to working capital and term loans, NBFCs can provide customised solutions to their clients.

NBFCs are using digital technologies to make it easier for MSMEs to get loans and are being used to approve loans quickly. Additionally, chatbots are being used to communicate with customers in their regional language, and cloud computing and AI are being used to speed up the lending process.

Invoice factoring is a way for MSMEs to get working capital by using their business relationships with large companies. NBFCs finance MSMEs’ invoices with more risk because they have better credit assessment tools. This ensures smooth operations by giving MSMEs access to more working capital when needed.

Thanks to RBI’s recent guidelines, banks are also getting involved in lending to MSMEs. The RBI has helped increase credit availability for MSMEs by taking advantage of NBFCs’ wider reach and banks’ lower funding costs.

NBFCs Propelling Economic Growth

Small business owners looking for MSME business loans often do not fit into the traditional banking system. This is due to their lack of credit history or the fact that their business falls outside the normal parameters banks use to evaluate loan applications. Non-banking financial companies (NBFCs) that use a digital ecosystem can learn how these businesses operate using revenue and business volume data. This makes loans faster and credit scores unnecessary, which can be especially helpful for last-mile borrowers who need customised services.

Despite specific economic, institutional, regulatory, and behavioural bottlenecks, MSMEs have seen significant growth in recent years. This is partly due to the efforts of NBFCs, who offer custom loan products and simplified application processes to help these businesses get the credit they need to grow. However, more can be done to promote financial inclusion for MSMEs. NBFCs and FinTech companies must work together to develop innovative digital tools that make accessing credit easier for last-mile borrowers.

The MSMEBlog provides expert solutions and guidance for financing small and medium-sized businesses. Visit for more information on MSME finance.

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