Home / Economy / NBFCs continue to be the primary catalyst for MSMEs' growth momentum: Experts

Considering its enormous role in employment and revenue growth, the MSME sector is regarded as a cornerstone of the nation's economy. A third of India's GDP comes from the Micro, Small and Medium Enterprises (MSME) sector, which accounts for approximately 63 million MSMEs and about 30% of the country's GDP. Owing to their service offering and technological advancements in the SME credit market, NBFCs have assisted MSME organizations in expanding their footprint in the economy. Here are the opinions of our sector experts on how NBFCs continue to be the primary catalyst for MSMEs' growth momentum.

Hardika Shah, Founder and CEO, Kinara Capital said “The MSME sector is considered a pillar of the country's economy due to its immense contribution to employment and income generation. At present, the 63 million MSMEs in India account for close to 30% of the country’s GDP. As the country moves towards becoming a $5 trillion economy, it is imperative that the biggest hurdle for MSMEs, which is access to formal credit, is resolved. That’s where last-mile NBFCs are making a difference by servicing niche credit demands, taking a different approach to credit assessment often without the requirement of property collateral. In the last financial year (FY22), NBFCs loans grew by more than 10% which was almost double of bank loans signaling the rapid demand for simplified access to credit."

“As India continues to be the world’s fastest-growing major economy, key drivers of growth for increased MSME credit can be attributed to: (i) Rise of India’s Exports and (ii) India’s Growing Urbanization. MSMEs already contribute to nearly 50% of its exports. In 2022, India’s exports have grown by 37% YoY so this is an important sector driving MSME credit demand. India is estimated to have 50% of its population living in urban areas in the next two decades. The rapid urbanization is causing high demand for products so domestic demand continues to rise creating more opportunities for MSMEs," said Hardika Shah.

Mr. Arun Nayyar, MD & CEO, NeoGrowth said “New-age NBFCs are increasingly leveraging analytics and data science for credit decisioning to speed up the loan process for MSMEs, making credit more inclusive. Assessment of creditworthiness by data-based statistical models brings objectivity, making the underwriting process scalable, and widening the coverage. The second dimension of improving reach is simplifying the entire loan application process for the customers. Cashflow-based lending now has momentum, fuelled by the increasing adoption of digital payment modes by small merchants. Digital transactions, which can be easily verified, bring reliability in assessing the health of the business."

“Strong technology ecosystem in India for financial services will be a catalyst of MSME lending in the coming years. We are already seeing the adoption of the Account Aggregator ecosystem, Digi Locker, and India Stack, which is simplifying lending. Such progressive developments will enable more entrepreneurs to build and scale their businesses easily, unimpeded by metrics such as credit scores and tax returns. 2023 will be a crucial year for MSMEs as India moves a step closer to realizing its USD 5 Trillion vision," said Arun Nayyar.

Vishal Suryawanshi, Vice President - Credit (SCF and Colending), Vivriti Capital said “For any business time is of essence. The opportunity cost of the business lost would be much higher than the incremental interest rate charged. NBFCs have made processes for lending less cumbersome with limited data and collateral. MSMEs can now check online their eligibility with few click of buttons and get funds within 1-2 days. The infrastructure exists where digital KYCs, bank statements, GSTR can be submitted to determine eligibility. The agreements can be digitally signed and the loan can be disbursed. It is possible to do entire transaction in 1-2 hours."

“Another key differentiator for any NBFC is how industry knowledge is built into underwriting. The past is not representative of the future. In fact if we are in the industry upcycle the past will look great however the future is uncertain. Therefore solely relying on the generic data without industry knowledge would lead to higher NPAs. The NBFCs can build in the methodology understanding of a specific industry or a specific geography. It is also important to differentiate specific product risk from the risk of an MSME business. Some of the products like Gold loan, supply chain finance the risk is in the product structure and not in the MSME who is the borrower. NBFCs are building product specialization to reduce risk and operating costs through more streamline processes," said Vishal Suryawanshi.

“Currently the overall economy is more volatile. There is uncertainty about the input raw material delivery. The businesses to meet uncertain demands of their customers. Therefore working capital requirements have increased. There is a pressure to improve margins and provide higher quality products which can be improved through more automation to reduce costs. There is a growth in the overall GDP, and the growth in MSMEs can be faster than GDP. Therefore more capacity creation is required in the MSMEs. This all requires more capital in a flexible manner. Generally, equity funding for a MSME is not easily available. Therefore debt funding becomes the only source to manage and grow the business," said Vishal Suryawanshi.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.


Vipul Das

Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for Goodreturns.in (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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