This blog explores the shifting preference of Micro, Small, and Medium Enterprises (MSMEs) towards Non-Banking Financial Companies (NBFCs) over traditional banks for obtaining loans. With a vast credit gap and limited access to bank credit, MSMEs are increasingly turning to NBFCs for their financial needs. We delve into the reasons behind this trend, examining the benefits offered by NBFCs and the role they play in empowering MSMEs to thrive in India's economy.
Micro, Small, and Medium Enterprises (MSMEs) are vital contributors to India's economic growth, accounting for a substantial portion of GDP, manufacturing output, and exports. Despite their significance, a considerable credit gap exists, leaving a significant number of MSMEs underserved in terms of bank credit. This article analyzes why MSMEs are now favoring Non-Banking Financial Companies (NBFCs) when seeking financial support, discussing the advantages offered by NBFCs and their pivotal role in empowering MSMEs for success in the Indian economy.
MSMEs-The Backbone of India's Economy : Driving India's Economic Engine Comprising around 64 million operating units, MSMEs play a critical role, contributing approximately 30% to India's GDP, 45% to manufacturing output, and 48% to exports. These enterprises also provide livelihoods for around 120 million individuals, emphasizing their significance in the country's economic fabric.
Addressing the Credit Gap : Despite their economic importance, only a limited percentage of MSMEs (about 14%) have access to credit from traditional banks. This leaves a substantial credit gap of USD 530 billion, creating an opportunity for NBFCs to bridge the financing divide and cater to the unmet financial needs of MSMEs.
NBFCs: Fulfilling MSMEs' Financial Requirements: Recent data from reputable sources indicates that NBFCs have witnessed a remarkable 24% year-on-year increase in fresh unsecured business loans, amounting to Rs 339 billion as of March 2023. This growth signifies the active role played by NBFCs in meeting the financial requirements of MSMEs.
A Competitive Scenario :Public sector banks (PSBs) have also seen growth in MSME advances, with a loan book growth of 12% from FY20 to FY23. However, NBFCs continue to be the preferred choice for MSMEs, with renowned names like State Bank of India (SBI), Punjab National Bank (PNB), and Union Bank of India in pursuit of capturing this market.
Reasons for MSMEs' Preference Towards NBFCs:
a) Streamlined Loan Application: NBFCs offer efficient and simplified loan application processes, alleviating MSMEs from the burdensome paperwork and extended approval periods typically associated with banks.
b) Flexible Collateral Requirements: Unlike traditional banks that often demand significant collateral, NBFCs offer more flexibility in collateral options, enabling MSMEs to obtain loans without risking valuable assets.
c) Swift Disbursals: NBFCs are known for their prompt disbursal of funds, addressing the immediate financial needs of MSMEs and supporting timely business operations.
d) Tailored Financial Solutions: NBFCs understand the specific requirements of MSMEs and provide customized financial products, empowering these enterprises to capitalize on growth opportunities.
e) Digital Solutions: Embracing technology, NBFCs offer digital loan processing and management, enhancing accessibility and convenience for MSMEs seeking financial assistance.
Conclusion: In conclusion, the growing preference of MSMEs towards NBFCs reflects the need for accessible and tailored financial solutions in order to unlock their true potential. As the credit gap persists, NBFCs are well-positioned to play a vital role in empowering MSMEs, fostering economic growth, and contributing to India's progress as a flourishing economy.
[Disclaimer: The information in this article is based on data available as of July 2023 from Business World article - https://www.businessworld.in/article/Banks-Vs-NBFCs-Why-MSMEs-Prefer-The-Latter-For-Loans-/25-07-2023-485348/ ]