For years, the commercial banking sector has been the dominant force in lending, including catering to the Micro, Medium, and Small Enterprises (MSMEs) sector. However, the evolving needs and demands of modern-day MSMEs have outpaced the traditional lending models. Abhay Bhutada, Poonawalla Fincorp’s MD, sheds light on the challenges faced by MSMEs and how Non-Banking Financial Companies (NBFCs) are emerging as crucial players in bridging the lending gap.
The Lending Landscape Dilemma
In a dynamic economic scenario, the lending space struggles to keep pace with the evolving needs of MSMEs. The Indian lending industry faces challenges such as limited access to finance, stringent scrutiny by traditional lenders, and the need for collateral. Shockingly, a report reveals that only 14 percent of the over 64 million MSMEs in India have access to credit, resulting in a staggering credit gap of $530 billion in the sector. This is particularly concerning given the substantial contribution of MSMEs to India's GDP and economic growth.
NBFCs' Strengths Unleashed
In response to the lending gap, NBFCs have emerged as key players with unique offerings and technology-based products. Abhay Bhutada underscores the strengths of NBFCs over traditional lending institutions. While commercial banks follow traditional lending practices that demand collateral and a proven credit history, NBFCs specialize in serving the last-mile population. Their wider regulatory framework allows for a broader range of activities and innovations, giving them a risk-taking ability that reaches consumer categories often underserved by banks.
Bridging the Gap with Specialized Services
The distinctive strength of NBFCs lies in their ability to cater to the specific needs of their segmented customer base. Specialized NBFCs strategically design tailor-made products, efficient distribution channels, and robust risk evaluation procedures. These companies offer product packages that include non-financial services, promoting customer loyalty, expanding their portfolio, and increasing asset size. Leveraging machine learning and data analytics, NBFCs personalize their product offerings, including business loans, quick loans, and supply chain financing.
Also Read: NBFCs and Digital Transformation: Shaping the Future of Finance
Co-Lending Models: A Collaborative Solution
The evolution of co-lending models involving traditional banks and NBFCs has further propelled credit flow to priority sectors at competitive rates. This collaborative approach benefits from the versatility of NBFCs' business models and lower cost of funding from banks. The infusion of digital technologies like e-signature and eKYC/Aadhaar-based verification has empowered NBFCs to cater to the large digital footprint of the Indian population, making their services more accessible and efficient.
Digital NBFCs Revolutionizing SME Lending
Digital NBFCs are at the forefront of leveraging technology to make credit more accessible to underserved customers in India. By employing alternate data sets and innovative credit underwriting approaches, they offer customized products with faster turnaround times. Ecosystem-based lending, facilitated by partnerships with digital platforms like Amazon and Google Pay, allows digital lenders to tap into available information about MSMEs, offering custom-tailored lending solutions.
The Way Forward: A Multi-Channel Approach
To bridge the credit gap in the MSME sector, a dynamic multi-channel approach with digital backing and vernacular access is imperative. While NBFCs have made significant strides in making last-mile borrowing more accessible, further expansion of their footprint is crucial. Identifying more gaps in lending, curating better products, and continuous refinement of technology are key aspects that NBFCs need to focus on to ensure the best lending experience for the MSME sector.
Also Read: Abhay Bhutada's Strategies for Enhancing Loan Prospects in MSME Sector
Summing Up
Abhay Bhutada's insights underscore the pivotal role played by NBFCs in revolutionizing the MSME financing landscape. As traditional lending institutions face limitations, NBFCs are adapting, innovating, and filling the credit gap, ultimately contributing to the growth and sustainability of the MSME sector in India.
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