How NBFCs are bridging the credit gap for MSMEs in India

The estimated 63 million MSMEs in India contribute approximately 30% of the nation’s GDP and 40% of its exports, which generates income for the country’s citizens. MSMEs are a significant source of employment and entrepreneurship in India, where about a million people enter the labour force each month. Over 120 million people work in the industry. However, this crucial sector suffers from a serious lack of finance, and as a result of these companies’ underserved credit needs, the MSME sector is currently experiencing a significant credit gap. The World Bank pegs the cost of this gap, which impacts more than 60 million MSMEs in India, at almost $380 billion.

What Sets NBFCs Apart from Banks

All across country, there is significant and visible presence of the banking industry. However, because they are traditional lending institutions, they remain restricted in how they can serve the last-mile section. The pool of potential borrowers is restricted by the rigid conditions that banks have in place, such as a proven credit history and the provision of collateral.  Since many MSME enterprises are first-time borrowers and lack the resources to offer security in exchange for a loan, they are frequently excluded from their reach. That is where NBFCs are useful. Since many of them specialise in specialised lending that standard lenders frequently neglect, they are essential to supplying last-mile financial services and inclusion.

Although NBFCs are registered with the RBI and subject to regulation by the central bank, they can operate in a wider range of activities and innovations than banks due to the regulatory framework they are subject to. The regulatory framework has a rather narrow range of permitted operations for banks. Due to their increased ability for risk-taking, they can connect with consumer categories that traditional companies, such as MSME enterprises, frequently underserve. Banks don’t offer the same range of services as NBFCs due to these limitations, despite having a larger presence and greater resources at their disposal. By offering specialised services and having a better grasp of these consumers’ demands, the latter have succeeded in becoming the financial service providers for last-mile customers.

How NBFCs are a key step towards universal credit access

Strategic Thinking

Specialized NBFCs offer specialised products and services that are catered to their demands and have developed several business models in accordance with their segmented customer base. They have done this by setting up efficient distribution and sales channels.

In order to more accurately assess the creditworthiness of MSMEs and ensure quick turnaround times, NBFCs have also developed credit evaluation procedures and risk management skills. MSMEs now have an additional incentive to seek for timely financing through official credit channels.

Product Packages

By providing product packages, NBFCs have been able to increase client retention rates and promote consumer loyalty. This indicates that in addition to credit loans, they also offer support for non-financial services. This unique product offering raises customer service standards, which promotes portfolio expansion for NBFCs. Based on the balance sheet lending strategy, this increasing asset size further enables NBFCs to borrow and lend more.

Business Loans or Quick Loans

NBFCs can personalize their product offerings to meet the needs of their customers thanks to machine learning techniques and data analytics. This is crucial in situations involving small-ticket loans, which MSMEs like for a rapid influx of cash. Other products offered by NBFCs include small company mortgage loans, loans against card receivables, hypothecation loans, e-commerce loans, and loans against property in addition to working capital and term loans.

Innovative techniques for evaluating credit

NBFCs have a higher tolerance for financing invoices hosted by MSMEs, in part because of their sophisticated credit evaluation systems. As a result, MSMEs have access to more working capital liquidity as needed, ensuring smooth operations.


Online NBFCs have developed dynamic underwriting models and digitalized their lending cycles. As a result, NBFCs are now able to provide services to unbanked MSMEs using tools like eKYC, e-signature, and Aadhaar-based verification.

Additionally, they use chatbots that speak the local language, cloud computing, AI, and ML approaches to speed up procedures that can improve the entire client experience.

Supply Chain Financing (SCF)

By offering supply chain financing to MSMEs that sell products to corporations, several NBFCs have closed the credit gap. NBFCs accomplish this by digitising the ecology of the supply chain. They either create their own cutting-edge credit solutions in-house or acquire outside technological solutions under the “Software as a Service” model. SCF finance enables MSMEs to take advantage of their current business connections with large corporations for their working capital requirements.

Co-lending with banks

A co-lending concept, recently adopted by the RBI, encourages banks and registered NBFCs to work together to jointly offer MSMEs operating in priority sectors loans at competitive rates. Due to NBFCs’ wider reach and cheaper bank funding costs, this has improved the flow of credit to underserved and unserved industries.

Final Thoughts

In order to close the MSME credit gap entirely, there is still a long way to go. The responsibility for developing digital tools and strategies that make use of the digital footprints and ecosystems of MSMEs rests with start-ups and the innovation ecosystem. In any case, NBFCS (both online and offline) deserves recognition for expanding to the periphery of the financial system.



Views expressed above are the author’s own.


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