NBFCs and the Digital Shift in MSME Financing

An increasing number of NBFCs are eyeing the MSME segment even as competition from banks intensifies, especially in sectors like vehicle, gold, and home loans. Several NBFCs have steadily expanded their MSME portfolio, easing the credit requirements of the sector.

Experienced regional players, with their deep understanding of micro-markets and low-cost distribution channels, are offering credit to smaller MSMEs outside tier-I cities. Because of the sector's promising prospects, these NBFCs have garnered deep pools of equity capital and also tapped into loans from investors who recognize the potential for solid returns.

With faster credit checks, snazzy new products, and innovative approaches to credit underwriting, the MSME lending game is getting a major makeover. The new-age NBFCs are offering financial products with terms that align with the operational cycles of MSMEs, incorporate flexible collateral requirements, and excel at risk management. These NBFCs’ laser focus on chosen sectors, regions, and client groups, and their tactical manoeuvres have upped their game in the MSME sector.

However, businesses in India, especially those geared towards exports, could face potential headwinds from the global economy in the near term. FY25 might hit India's MSMEs hard if the US and EU economies slow down. As the year wears on, roughly one out of every five MSMEs, according to a recent study, will likely experience an increase in working capital requirements. Of the total debt required for the MSME sector, roughly 70% is needed for working capital. Only a quarter of this debt is acquired formally, and the interest rates charged by the informal sector are pretty steep.

With the financial landscape becoming increasingly complex for MSMEs, there's a pressing need to design new frameworks for MSME lending. In 2022, the Parliamentary Standing Committee on Finance put forth the idea of a 'UPI for MSME Lending'; the goal was to establish a fully mobile-based and cost-effective method for MSMEs to secure small-ticket working capital loans.

The nifty digital solution has the potential to smooth out hurdles sufficiently to shift the balance, compelling financial institutions to vie for MSME loans. Also, making loan offers visible in a remote, real-time manner can drive down interest rates, tilting the scales to favour MSMEs in their choice of offers. Secondly, for New-to-Credit (NTC) customers, getting loans over 5 or 10 years without collateral is tough. Offering unsecured short-term loans for 60 or 90 days, however, might just hit the sweet spot, if transaction costs are whittled down. MSMEs can then gradually develop a credit history for larger ticket sizes over time.

A powerful digital ecosystem increases trust in virtual information and assertions, leading to greater inclusivity for smaller MSMEs. Additionally, a unified ecosystem for digital lending can ensure complete interoperability among all parties engaged in every stage of the lending process. This will help eliminate entry hurdles and proprietary walls, simplifying the lending and borrowing journey. ?

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