Inclusive credit access led by NBFC will facilitate effective growth reboot in small business segments


There is no denying that credit is the undisputed growth enabler for the small businesses looking for working capital and growth capital at every stage of the business cycle. However, making the access to credit inclusive has been the key concern for the policymakers in the government. As M Rajeshwar Rao, Deputy Governor, Reserve Bank of India has reiterated the fact that “inclusive credit will have to be the bedrock of inclusive financial inclusion” at ASSOCHAM’s 17th Annual Summit & Awards on Banking & Financial Sector Lending, the focus is firmly on the how to increase access to credit to the small businesses. 

The micro, small, and medium enterprises (MSME) sector of the country consists of over 63.39 million businesses, contributes to 30 percent of the country’s GDP and generates employment to more than 9.3 million people (As per the data from the Udyam Portal of the Ministry of MSMEs). But, the sector remains essentially underserved when it comes to financing. 

Here is the reality check. According to ‘BLinC Invest MSME Lending Report 2022’ released by venture capital (VC) firm BLinC Invest, the MSME sector has a total credit demand of Rs.69.3 trillion, growing at a compounded annual growth rate (CAGR) of 11.5 percent and less than 15 percent of the demand is being met with formal sources of lending.

The recently released RBI report on Trend and Progress of Banking in India FY2021-22 highlights that the exposure of banks to NBFCs increased thanks to the increase in direct lending which accounted for 86.5 per cent of the total bank funding to the NBFC sector. But the fact remains, in a bank-dominated financial ecosystem, availing credit is a perennial challenge for the small businesses, especially for those with innovative business models and unconventional profit patterns. In the booming entrepreneur-driven start-up ecosystem, companies with higher risk-return profile often find it challenging to avail credit from banks. Small businesses from the unorganised segments often remain credit-starved due to their inadequate credit history and inability to present their credit worthiness effectively to the lenders. There are SMEs that don’t have the assets which can be promptly collateralized to avail credit. In addition, there are small businesses located in remote and rural areas and those far-off locations inevitably put those businesses beyond the reach of the formal credit ecosystem. 

Therefore, credit-constrained small businesses end up paying higher interest rates to avail credit. So, diversified financing options are just right for them to meet their varied credit demand and position strongly on the growth path driven by innovation.

Asset-based lending is one of the proven ways to bring inclusivity in credit access to SMEs. Asset-based finance has emerged as a key borrowing instrument for the MSMEs to meet working capital requirements in the Organization for Economic Cooperation and Development (OECD) countries.  As per an OECD SME Ministerial Conference discussion paper released in 2018, in Europe the prevalence of alternative financing instruments for SMEs such as asset-based finance, alternative debt, etc. is almost on a level with conventional bank lending.

The policy makers in the government can take a leaf out of the lending playbook of those countries to strengthen the alternative lending ecosystem mainly driven by NBFCs. The recent RBI report has acknowledged a consistent increase of NBFCs’ credit as a proportion to GDP. The UN has recognized financial inclusion as an enabler for 7 of the 17 Sustainable Development Goal and NBFCs can play a critical role in facilitating access to credit to a large section of micro-enterprises and small businesses. Although banks are offering serious competition to NBFCs, NBFCs remain a major force to enhance financial inclusion. In 2023, the government needs to leverage the competencies of the NBFC sector in making inclusive credit access a reality so that small businesses can launch a strong reboot in this phase of economic revival.



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Views expressed above are the author’s own.



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