The Indian MSME segment, long seen as a risk averse and loan defaulting segment by the traditional banking industry, is finally having its day under the sun. This is largely due to the increasing focus of NBFC’s (Non-Banking Finance Companies) on the MSME segment and the launch of several innovative financial products by the NBFC’s to meet the credit requirements of the MSME sector.
NBFC’s, is the term used to commonly describe entities, whose core business is financial lending & investing. They typically lend funds to organisations and individuals and also invest funds for infrastructural growth. While they are similar to banks, they are governed by a different set of rules by the RBI, which prohibits them from offering all banking related services. Their dedicated focus on lending to the MSME sector has seen them grow their market share by nearly double to 10% in the period from 2015 -2018, while banks have seen a drop in their share from 95% to 90% in the same period. There are a few key factors responsible for this growth, among which the primary reasons are innovative financial products, non-traditional ways of assessing the credit worthiness of the borrowers and their reliance on technology.
Easier access to funds
Anyone who has taken a loan from a bank in the past is well aware of the time required for processing a loan and the loads of paper work required for it. The same was even more complicated for MSMEs, who typically ran small business based on local requirements, handicrafts or supplying components to larger corporations. As such, their business model was not stable and had many up’s and downs. Due to this they often failed to meet the stringent rules of banks and were not able to get the finance when they required it.
NBFC’s typically follow a non traditional approach to lending based on varied parameters such as the borrowers business cycle, receivables, cash flow requirements and the scope for growth and repayments thereof. This allows NBFC’s to take a holistic view of the borrower and help finance their growth or short term financial requirements as and when they need it.
Customer oriented approach
NBFC’s are more proactive when it comes to meeting the finance requirements of MSMEs, as compared to banks. They offer tailor made solutions that helps MSMEs meet different finance requirements, right from their payroll to purchase of raw materials and even against future receivables. Moreover their customer friendly approach, with minimal documentation and fast disbursement of funds helps MSMEs plan their finance requirements well in advance and as per their needs.
NBFCs also offer flexible interest rates and payback periods to MSMEs, which makes them an attractive financing option for their funding requirements, be it short term or long term. In case of retail stores and trading organisations, some NBFC’s also offer credit against their POS receivables which is calculated on an x factor of their daily sales. This is especially useful for small retail stores who want to increase their store stock levels during festive seasons.
Usage of technology
NBFCs are investing heavily into technology that helps them reach newer markets, rate the credit worthiness of their borrowers, reduce documentation and facilitate faster disbursement of the sanctioned funds. All this is hugely beneficial to MSMEs, who normally spend days approaching banks for loans, preparing the extensive documentation required and awaiting the disbursement of funds. Sometimes, due to this lengthy procedure, they often receive the funds too late, for it to be of any value to them.
The usage of the latest technologies such as AI (Artificial Intelligence) and Machine Learning, also helps NBFCs determine the sectors in need of funding and prepare customised finance solutions for these sectors. This pro activeness helps them approach the sectors in need of funding directly and offer their financial solutions and products, based on their exact requirements and in line with their needs.
Technology also plays a key role in identifying possible delinquencies and avoiding them, in order to maintain a healthy loan-to-default ratio, which is essential for the NBFC’s to meet their regulatory requirements. It also serves as a last mile connectivity factor and helps NBFCs reach out to newer markets and customers, who are not served by the banks or have not, accessed any financial products in the past. This helps spur industrial growth and in turn helps boost the economy.
A complete sector focussed approach backed by easy customer accessibility and technology are the key methods NBFCs are using to meet the credit requirements of the MSMEs and ensure that they too remain competitive in today’s growing & competitive market scenario.