Micro, Small and Medium Enterprises (MSMEs) have long been recognized as the cornerstone of India’s economy, making substantial contributions to job creation, innovation and inclusive growth. These small businesses play a pivotal role in boosting the nation’s GDP, exports and employment landscape. According to data from the Ministry of Micro, Small and Medium Enterprises, India boasts a staggering 63 million MSMEs, employing more than 113 million individuals, making up approximately 40% of the nation’s workforce. In addition, MSMEs account for about 30% of India’s GDP and a whopping 45% of its manufacturing output. Despite their significant contribution to the Indian economy, MSMEs often face obstacles in accessing capital, attributed to limited available collateral, low credit scores, and limited. financial literacy. Traditional financial institutions often impose strict lending criteria, thus making it difficult for MSMEs to secure business loans. This, in turn, limits the growth of these businesses as they struggle with financial constraints.
This difficulty hinders the expansion of the MSME sector, which is keenly aspiring to penetrate new markets and meet the burgeoning demands of consumers. It is in this context that Non-Banking Financial Companies (NBFCs) emerge as catalysts, ready to facilitate the expansive journey of MSMEs.
NBFCs form an integral part of India’s financial sector rigorously regulated by the Reserve Bank of India. They bridge the gaps left by traditional banking channels by providing fast, convenient and easily accessible credit options to MSMEs. These institutions also distribute a variety of other financial services including investments, insurance etc. to businesses, individuals, and various other entities. This versatile range of services gives MIMEs the essential capital to increase their operations and introduce new products for their clients.
In addition, many NBFCs offer collateral-free business loans to MSMEs, a notable respite for these smaller entities. While conventional wisdom might dictate that MSMEs approach banks for business loans, these institutions are often hesitant to extend loans to MSMEs due to difficulties in adhering to regulatory standards. The high collateral requirements and complicated application procedures constitute the main roadblocks faced by MSMEs in seeking capital from banks. In contrast, NBFCs, equipped with alternative assessment parameters, serve businesses new to formal credit, facilitating a more flexible lending process.
NBFCs offer invaluable financial guidance and expertise, pivotal to the triumph of MSMEs. Such services help MSMEs to better understand the dynamics of accessing credit and optimizing its utilization. This support is particularly useful for early stage MSMEs who may lack prior experience in navigating the complicated financial landscape.
Notably, recent reports from CRISIL Market Intelligence & Analytics suggest that approximately one-fifth of the MSME sector is projected to experience an increase in working capital requirements for this fiscal year, compared to pre-pandemic levels in fiscal 2020. Working capital, representing the funds required for meet daily operating expenses, consists of the most liquid part of the total capital of a business.
The debt requisition of the MSME sector is estimated to exceed Rs 100 lakh crore, with nearly 70% earmarked for working capital needs. To illustrate, the Gujarat cluster, which includes export-oriented MSMEs in Ahmedabad and Surat, anticipates an increase in working capital days in the current fiscal year, relative to pre-pandemic norms. The Ahmedabad cluster expects an increase of 20-25 days, mainly driven by increased working capital requirements in the dyes and pigments, while the Surat area anticipates an extension of 35 days, attributed to increased demands in the diamond export sector.
In summary – NBFCs are well attuned to the challenges facing MSMEs and have played a pivotal role in their promotion and nurturing. While NBFCs have made strides in providing credit to MSMEs through their targeted business models and tailored loan products, there is ample room for collaboration between NBFCs and FinTech companies. This collaboration can leverage digital tools to further ensure financial inclusion, promising a more vibrant and prosperous future for India’s MSMEs.
This article is written by Rohan Juneja, MD & CEO, TruCap Finance Limited. All opinions expressed are personal.
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