Growth-hungry NBFCs want a bigger share of MSME loan market

NBFCs offer the promise of quick loans disbursals, easy and flexible repayment facilities and non-collateralised loans. And those are the terms that MSMEs like

For years, commercial banks have dominated lending to Micro, Medium and Small Enterprises (MSMEs). They are now confronting competition from Non-Banking Financial Companies, or shadow banks as they are known, which are turning more aggressing in funding MSMEs. By all accounts, the competition is set to heat up.

For borrowers, NBFCs offer the promise of quick loans disbursals, easy and flexible repayment facilities, and non-collateralised loans. And those are the terms that MSMEs like.

Take a look at this. On an individual basis, top NBFCs outpaced commercial banks combined in terms of loan growth to small borrowers, according to the latest data available for both sets of lenders.

According to the Reserve Bank of India’s February 2023 Sectoral Deployment Credit Growth data, outstanding bank credit to MSMEs was Rs 32.9 lakh crore as of what period, an 8.7 percent Year-on Year (Y-o-Y) growth.

Non-Banking Financial Companies eclipse commercial banks in loan growth to small companies. The competition is set to heat up

Also read: RBI Deputy Governor Rajeshwar Rao pitches for more credit push to MSMEs

The MSME portfolios of major NBFCs leapt. Bajaj Finance, in its December quarter results, posted a 33 percent increase in its MSME loans from Rs 23,153 crore a year prior to Rs 30,880 crore in December 2022.

Aditya Birla Capital’s MSME portfolio recorded a 59 percent rise from Rs 42,034 crore a year ago to Rs 47,856 crore in December 2022.

L&T Finance’s MSME portfolio had reached Rs 538 crore in December 2022 from a mere Rs 16 crore in December 2021.

Quick disbursal, flexibility

“Loans from NBFCs have seen major growth. We can see that because NBFCs now want quick disbursal and flexibility which NBFCs are able to provide more than banks,” an NBFC analyst said.

Gopinath Rao, Deputy Director of the MSME Development Institute, said banks had a bigger portfolio of MSME loans but borrowers were turning increasingly to NBFCs for credit.

Banks, including major public and private banks, have introduced customised platforms and services for MSME customers. Public sector lender Canara Bank, for instance, provides contactless loans and other credit services to MSMEs.

Among private sector lenders, ICICI Bank, in May 2022, started a dedicated digital platform for MSME borrowers. This platform could help secure easy credit and other timely loan services. South Indian Bank provides instant approval for a Rs. 1 crore loan to MSME borrowers.

These steps, experts said, are aimed at attracting MSME customers towards borrowing more from banks but haven’t quite worked out for the lenders.

Post-loan assistance

“MSME borrowers are not only looking for digital loans but they also want smooth post-loan assistance. When it comes to that and to repayment, NBFCs are much better than banks,” said the analyst quoted above.

Hardika Shah, Chief Executive Officer (CEO) of Kinara Capital, said NBFCs often had a more flexible approach towards lending and catered to the specific needs of borrowers.

NBFCs offer the promise of quick loans disbursals, easy and flexible repayment facilities and non-collateralised loans. And those are the terms that MSMEs like.

“NBFCs are more willing to work with borrowers who lack property collateral or a lengthy credit history, which can be a significant hurdle when dealing with traditional lenders,” said Shah.

Shah added: “Since NBFCs take a different approach towards assessing creditworthiness than banks do, they can process loan applications and disburse funds faster. This is crucial for MSMEs that need quick access to working capital to take advantage of growth opportunities.”

Other than this, experts also said MSME lending was just one of the borrowing windows for full-fledged bans whereas NBFCs were looking at MSMEs as theirs core market.

“While banks are evaluating MSMEs for sector diversification, existing and new NBFCs see MSME as their core market and clientele,” said Amit Shankar, Vice President of Vivriti Capital.

Also read: Budget 2023 | Most MSMEs doing well but financing still an issue, says FISME secretary general

Credit demand and supply

Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao said recently that banks and other financial institutions should see MSMEs as an opportunity to push more credit.

“Another critical issue in India’s credit market has been the consistent gap between the demand and supply of credit to MSMEs. This has to be seen as an area of opportunity by the banks and other financial institutions. The MSME sector contributes around 30 percent to India’s GDP, 45 percent to its manufacturing output, and 48 percent to exports,” Rao said.

An Avendus Capital report on MSME lending said there exists a credit gap of $530 billion in the MSME sector. “India has over 64 million MSMEs but only 14 percent have access to credit,” said the report.

Experts say the MSME is a growing sector in India and its credit demands need to be fulfilled by financial institutions.

“Collateral has been an issue for loans with banks. Banks are a huge source of credit for MSMEs, NBFCs have some features which incline borrowers to borrow from them,” said JR Bangera, a member of the National Board for MSMEs.

Going digital

Going ahead, the use of information technology (IT) and artificial intelligence in assisting MSME borrowers will create a huge impact on the MSME portfolios of banks and NBFCs.

In line with this, experts said NBFCs have well-positioned data-driven strategies and analytics to cater to MSME borrowers.

Also read: India’s NBFCs need funds to meet growing credit demand over next 2 years

“By adopting digital initiatives like account aggregators, digi locker, India stack, and E-KYC (Know Your Customer), NBFCs are able to better understand customer needs and build solutions accordingly,” said Arun Nayyar, Managing Director MD and CEO, NeoGrowth, an RBI-registered NBFC.