The estimated 63 million MSMEs in India form a significant pillar of the Indian economy through their contribution to over 30% of the country’s GDP and 40% of India’s exports, leading to income generation. With close to a million people entering the labour force every month in India, MSMEs are an important source of both employment and entrepreneurship. The sector employs over 120 million people. However, there is a severe dearth of financing for this critical sector, and as a result of these businesses being underserved, there is a vast credit gap in the MSME sector. This gap, which affects more than 60 million MSMEs in India is estimated by the World Bank to be at around $380 billion.
Let's explore the scope of non-banking financial companies (NBFCs) and digital lending in bridging the credit gap in the MSME sector.
The banking sector has a widespread and prominent presence across the country. However, being traditional lending institutions, they have certain constraints that limit them from servicing the last-mile segment. Banks have certain hard and fast requirements in place, like established credit history and the provision of collateral, which limits their pool of borrowers. Last-mile borrowers like MSME entrepreneurs are often left out of their ambit, since many of them are new to credit, and don’t have the wherewithal to submit collateral in exchange for a loan. This is where NBFCs come into play. Many of them specialise in niche financing often overlooked by traditional lenders and are, therefore, critical to providing last-mile financial services and inclusion because they.
Although NBFCs are registered with the RBI and regulated by the central bank, based on the regulatory framework they are governed by, they can undertake a wider spectrum of activities and innovations compared to banks. For banks, the range of permissible activities is relatively limited by the regulatory mechanism. This gives them a greater risk-taking capacity to engage in customer segments which are often underserved by traditional players, like MSME entrepreneurs. As a result of these constraints, even with a stronger presence and more resources at their disposal, banks don’t have the same service reach as NBFCs. The latter have been able to establish themselves as the financial service providers for last-mile customers with customised services and a deeper understanding of the needs of such customers.
NBFCs form the last-mile link in the supply chain of credit to low-income households and businesses, particularly those who are in the business of microfinance, financing of equipment, MSME business loans and the like. Their customers are those who cannot otherwise get loans from banks and for whom NBFCs have devised accessible ways to get capital.
Digital lending has played a critical role in delivering financing solutions to last-mile borrowers. As of January 2022, there are more than 9,500 NBFCs registered with the Reserve Bank of India, many of which have adopted the fintech model.
Fintech in India is a burgeoning industry that has stayed well ahead of the global race in terms of adoption. The EY Global Fintech Adoption Index 2019 showed that fintech adoption in India had grown to 87% compared to the global rate of 73%. According to more recent reports, the country continues to hold its place of pride as the fastest growing fintech hub in Asia. While a large part of the industry is oriented towards B2C services at present, fintechs also present an enormous opportunity for B2B operations, especially when it comes to MSMEs.
The amendment of the Reserve Bank of India (Amendment) Act, in 1997, increased the scope of operations for NBFCs and sped upled to their technological transformation. The past 20 years have witnessed NBFCs become a prominent part of the Indian financial services landscape, notably after the union cabinet opened the doors for foreign direct investment into regulated NBFCs in August 2016.
Fintech companies make up 50% of the digital lending landscape in India. According to a report by Fintech Association for Consumer Empowerment, fintechs companies doubled disbursements in the financial year 2021-22, disbursing a total of 2.66 crore loans worth ₹18,000 crores. Of these, 16% disbursals were made in Maharashtra, while the southern Indian states collectively accounted for 44% of the uptake. Kinara Capital, with its presence in 6 states and an union territory, including Maharashtra, Karnataka, Tamil Nadu and Andhra Pradesh, is perfectly poised to cater to this burgeoning market. With a huge increase in uptake of digital transactions across the board, accelerated by the COVID-19 pandemic, this promising position is beneficial for both the fintech lender and last-mile borrowers.
Last-mile borrowers need a set of specific services tailored to their needs, which banks are often unable to provide. For instance, many small business owners in this category are new to credit, so they need non-traditional evaluation and credit underwriting mechanisms in order to get a MSME business loan. This is a framework that NBFCs that follow the fintech model are able to adopt, while banks, with their more traditional systems in place, fail to cater to these needs.
Similarly, last-mile borrowers often need a simplified application process and an elaborate support system when it comes to seeking a loan. Banks, with their extensive and time-consuming documentation needs and application process, are less than ideal for such customers. In many cases, small business entrepreneurs, especially women, are unable to visit a bank branch frequently and invest time in waiting to receive support services. NBFCs on the other hand, often have much better last-mile service offering including helplines, doorstep service and in-person visits, which can help these customers navigate the MSME business loan process. For instance, Kinara Capital’s customer app myKinara offers an end-to-end digital solution which allows customers to take a 1-minute loan eligibility check and then complete the loan application online, with minimal documentation.
Another clear advantage that last-mile NBFCs have in catering to this particular section of customers is their extensive presence through branch networks and representatives in remote regions where fewer banks have a footprint. This positions them well to serve Tier 2 and 3 cities, as well as rural areas. Kinara’s hybrid model of service delivery, which combines digital solutions with doorstep customer service, makes them accessible to a wide range of customers who would not be able to approach traditional lenders like banks.
There is a need for increased efforts and tech disruptions to improve capital access, in order to bridge the credit gap in the MSME sector. Kinara Capital is actively engaged in efforts to drive financial inclusion for entrepreneurs by extending MSME business loans to them through a multi-channel approach, complete with digital backing and vernacular access. The NBFC is leveraging its vast network of branches and executives to make last-mile borrowing smooth and accessible for its customers. Going forward, the company is further expanding its footprint and continues to refine its technology to ensure the best outcomes for its MSME customers.