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How NBFCs Are Aiding The Growth Of Micro Entrepreneurs

Banks have not been able to cater to the funding requirements of micro enterprises and fill the INR 5 trillion credit deficit facing the sector

Photo Credit : PTI


Lack of formal credit has been one of the major reasons hampering the growth of micro enterprises in India. If India needs to grow to a USD 5 trillion economy, it needs to leverage the growth potential of this sector. Banks have not been able to cater to the funding requirements of micro enterprises and fill the INR 5 trillion credit deficit facing the sector. Their traditional credit assessment methods, standardized products and processes have been inadequate in addressing the requirements of micro entrepreneurs.

While traditional large lenders have remained overly cautious in providing credit facilities to the sector, a host of new age non-banking financial companies have already stepped up to tap into the huge opportunity. Along with being nimble, NBFCs have been innovative with their products and service delivery methods to attract the segment and address their unique challenges. Following are 3 ways by which NBFCs are aiding the growth of micro enterprises:

1. Making credit accessible – Majority of micro enterprises do not maintain formal books of accounts making risk assessment nearly impossible through traditional underwriting methods. NBFCs have addressed this challenge by finding a balance between traditional underwriting principles and surrogate parameters. New age NBFCs have invested in technology and analytics to build advanced credit scoring models based on alternative data points like mobile records, social media data, psychometric data etc which have been able to assess the risk for small ticket size loans.

NBFCs have made it much simpler for micro enterprises to access credit facilities. They have not only made the entire credit process digital but also have setup lean local branches wherever last mile connect with enterprises has been a challenge. With simplified and seamless processes along with advanced underwriting models for risk assessment to address the lack of income proofs, NBFCs are becoming the lenders of choice for micro entrepreneurs.

2. Customized products – Micro enterprises are diverse with each cluster having their own seasonality. NBFCs have gauged the seasonality of various clusters in which micro entrepreneurs operate and built in depth operational knowledge to better understand their working capital requirements. This has helped them in building customized products that better suit the needs of these small businesses. Today, NBFCs not only offer small ticket size business loans, gold loans, loans against property, BNPL but also products based on demographics like women specific products to support female micro entrepreneurs.

3. Value added support – New age finance companies have taken up the task of spreading financial inclusion and bringing small businesses under the ambit of organized financial services. To bring holistic development, as part of their business mandate they also provide various other services like assisting micro enterprises with bookkeeping, digitizing stores, and market linkages. This brings efficiency, increased sales and revenue and in turn more returns out of their money invested.

4. Collaboration – New age NBFCs are today tying up with fintech players like card service providers, account management platforms, wage management platforms, buying clubs etc. to provide credit to their users. NBFCs here, leverage the data captured by these fintech players for credit assessment further easing the access to affordable credit to micro entrepreneurs who have quickly adopted to these innovative digital solutions.

Having established vast network of branches in the hinterlands of India, NBFCs have gained ground level understanding of the profile of their customers which gives them an edge over traditional banks. They provide a personal touch to the micro businessman during the process of disbursement and repayments. NBFCs have thus carved an unprecedented niche of loyal customers, by establishing a way to provide credit facility to various unbanked segments. With micro enterprises and MSME Sector as a whole being listed as one of the top three contributors to the growth of lending in NBFCs, this is creating a “win-win” situation for both the entities along with ensuring that India is on a path of holistic growth

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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bfsi entrepreneur nbfc banks formal Credit

Sovan Satyaprakash

Head - Strategic Programs, Aye Finance

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