#3 Ways in Which NBFCs are Solving Credit Deficit for MSMEs NBFCs are being increasingly looked upon as the change agents that help the micro-businesses unleash their true potential

There are close to 5 million MSMEs operating in India today contributing 8% to the National GDP and 40% to our exports, and offering employment opportunities that are second only to the agriculture sector.

The sector has been growing at a steady rate of 10% and has always been looked at as a pivotal player in the "India Shinning" story. Despite the potential and the significance of the sector, it continues to battle with myriad issues, timely and affordable finance remains at the top of the list.

Banks have followed a safe path of lending and have lent only to segments that have well maintained books of accounts and a documented credit history. And the micro and small enterprises have neither. This has thus resulted in the gap between the demand and supply of credit to the MSME sector to rise to $ 5 trillion.

However, the last decade has seen emergence of new-age NBFCs, which have stepped up to meet this credit deficit by working around the obstacles of thin or lack of financial information of these businesses.

They have leveraged technology to not only simplify the lending process for the micro and small businesses but also reduce their borrowing costs and enhance customer experience. Their credit assessment processes are based not on traditional methods but on data analytics and an in depth understanding of the industries and clusters they lend to. It thus comes as no surprise that the financial services provided by NBFCs (loans and advances) have been growing at a brisk pace of 14.2%. (Source: Financial Stability Review, Reserve Bank of India, September 2015)

The NBFCs are being increasingly looked upon as the change agents for facilitating the micro-businesses unleash their true potential.

Here's taking into account three important strategies the NBFCs have deployed to lend to this vibrant sector and fuel their growth:

Making Business Credit Accessible

NBFCs are making it much simpler for small businesses to access credit facilities, having orchestrated a series of well-meditated efforts to reach out to the micro, small and medium-sized enterprises in India. NBFCs have offered solutions to meet the various needs of India's burgeoning MSME landscape, including consumer durable loans, mortgages, line of credit and more.

Additionally, they have established the last-mile connect with these businesses through a network of local branches, loan camps in the local markets during regional festivities or events to create more awareness about the services they offer. With simplified and seamless procedures, flexibility as a strategy and unconventional risk mapping processes, NBFCs are bringing about a paradigm shift in lending enabling MSMEs borrow at economical terms.

Disrupting the Status Quo

NBFCs have brought about innovations not only in their credit assessment of this sector but also in the products, designs and sales processes , to offer a line of credit which matches the sector's needs.

They have offered original products, including gold monetization, loan against shares, crediting commercial vehicles, peer-to-peer lending, occupation specific products etc.

In addition, a few new-age finance companies have taken the entire sales process online, increasing its reach to the sector which is spread across the geographical expanse of India. While banks rely on credit scores to analyse the risk potential, NBFCs have come up with newer and more democratic means, such as social profiling, Aadhaar, Tax Data, Bank Statements, Psychometric Analysis and others.

Helping the Unbanked, Undocumented Strata

New-age finance companies have taken the colossal task of increasing financial inclusion and bringing the Indian MSMEs under the ambits of formal economy.

In addition, these new-age finance companies have been going beyond their business obligations and have been assisting in the uplift of the micro and small businesses they serve through advisory services on bookkeeping, supply chain management, sharing best business practices etc.

It has paid back for NBFCs to cater to a homogenous mix of target markets. By extending the credit facility to various segments otherwise snubbed by traditional banks, such as, non-salaried people, rural enterprises, low-income households etc, NBFCs have carved an unprecedented niche for themselves.

The more recent strides in lending to MSME businesses is showing signs that this segment once perceived as "risky' could reveal a surprising robustness. And the recent time has seen this segment attract a variety of market players in India which have devised unconventional products, distribution strategies and credit assessment methods to fill the colossal credit deficit facing the MSME sector.