Buy Now, Pay Later: What Attracts MSMEs to the Concept?

Credit and finance for MSMEs: MSMEs are slowly warming up to the short-term alternative to no-cost EMIs in order to solve their cash flow problem. MSMEs are starved of access to formal credit through traditional collateral-based financing channels. Basically, business-to-business payments or the "pay later" option allow small firms to do things like pay staff, buy merchandise, and handle daily operational costs. As a result, the BNPL model has attracted the interest of both lenders and borrowers due to its short-term credit and reasonable interest rates that, on the one hand, assist MSMEs in managing their working capital cycle and, on the other, enable lenders to draw in additional clients to their portfolio.

The BNPL'stress'

Even though the amount disbursed under BNPL loans (B2B or B2C) is only 0.73 percent by commercial banks and 2.07 percent by NBFCs of the total amount disbursed, the volumes are quite significant (37 percent by banks and 11.9 percent by NBFCs), indicating a large number of small size loans for consumption, according to a report by the Reserve Bank of India (RBI) in November last year.

In light of this, stakeholders who were consulted for the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps report by the RBI suggested that the central bank must explicitly redefine what constitutes credit in order to classify BNPL as a loan and thereby bring it under regulatory coverage since BNPL has remained outside of the direct RBI regulation.

Cost

BNPL B2B credit charges an interest rate of up to about 24 percent, which is lower than the up to 48 percent charged by other short-term credit instruments like credit cards. This is one of the factors contributing to BNPL's growth in the nation. The cost of funds for lenders has increased as a result of the monetary policy committee (MPC) of the central bank repeatedly hiking the repo rate.