NBFCs Fill Financing Gap for MSMEs and Startups

In a buyer-seller relationship, the buyer often secures goods and services on better terms and conditions when there is a larger pool of sellers. In many cases, buyers also benefit from lucrative offers, including additional services. Micro, Small, and Medium Enterprises (MSMEs) and startups, which play a pivotal role in India’s economic growth, significantly contribute to GDP, employment, and innovation. However, accessing timely and adequate financial resources remains a key challenge for these businesses. Non-Banking Financial Companies (NBFCs) have emerged as crucial enablers, filling the financing gap left by traditional banks. Their flexible, innovative, and tech-driven approach has opened new doors for MSMEs and startups, driving their growth and sustainability.

A recent media report states that M. Nagaraju, secretary of the Department of Financial Services, said, “India needs to bring 80 percent of their micro, small, and medium enterprises (MSMEs) under the formal financial system from the existing 40 percent.” Banks and financial institutions play a vital role in fostering economic growth and development by offering capital and financial services at affordable rates and empowering businesses and individuals to thrive.

NBFCs differ from traditional banks in that they offer a more personalized, agile, and often less stringent lending process. While banks are typically risk-averse and focused on large corporations, NBFCs have tailored their products to the needs of MSMEs and startups, offering them easier access to credit. Key factors that distinguish NBFCs include:

Flexible Loan Products: NBFCs offer customized financial products such as working capital loans, equipment financing, and business expansion loans. Unlike traditional banks, they are more willing to accommodate the unique needs and shorter credit histories of startups and MSMEs.

Faster Loan Approvals: Thanks to the adoption of technology, NBFCs offer quicker approval and disbursement of loans, essential for small businesses that need immediate capital.

Collateral-Free Loans: Many NBFCs provide unsecured loans, reducing the burden on MSMEs and startups that often lack sufficient collateral.

Alternative Credit Scoring Models: NBFCs use innovative credit scoring models, such as transaction history, business cash flows, and other non-traditional data, making it easier for MSMEs and startups to qualify for loans.

TReDS: TReDS (Trade Receivables Discounting System) is an RBI-approved electronic platform and an institutional mechanism for factoring of trade receivables of MSME sellers. It enables discounting of invoices through an auction mechanism to ensure prompt realisation of trade receivables. It provides collateral-free financing, enhances cash flow, and ensures quick payments, with multiple financiers bidding to offer competitive rates. however, the untold story is that MSMEs providing services or goods to underrated companies are unable to get the TReDS services. As India is witnessing huge growth in start-up ecosystem hence uncountable new start-ups providing goods and services to these the underrated companies and start-ups are waiting for bright sunny day and in many cases new NBFC like Parrami Finance Pvt Ltd in a business of Invoice discounting are standing like a pillar.

Digital Platforms and Tech-Driven Solutions: Digital lending platforms are revolutionizing the financial landscape for MSMEs and startups. NBFCs leverage digital technology for end-to-end loan processing, reducing paperwork and speeding up the process, making financing more accessible, even in rural and semi-urban areas.

Driving Growth for MSMEs and Startups

Inclusive Financing: NBFCs have been instrumental in extending credit to underbanked and underserved sectors, particularly in rural and semi-urban areas. By providing financial access to smaller businesses that may not meet the strict criteria of traditional banks, NBFCs empower entrepreneurs and local industries.

Enabling Innovation and Startups: The startup ecosystem thrives on innovation, and NBFCs, by offering easier access to venture capital and growth financing, allow these ventures to scale rapidly. The absence of red tape and quicker decision-making processes align well with the fast-paced nature of startups.

Bridging the Credit Gap: The World Bank estimates that the credit gap for Indian MSMEs is over $380 billion. NBFCs, with their focus on microfinance, are helping bridge this gap by providing microloans and nano-credit solutions to the last mile.

Challenges and Way Forward

While NBFCs are revolutionizing access to finance for MSMEs and startups, they face challenges like liquidity issues and the need for stronger regulatory frameworks. The Indian government and the Reserve Bank of India (RBI) are taking steps to support NBFCs, recognizing their critical role in the country's economic framework.

The future looks promising as NBFCs continue to leverage technology, collaborate with fintech startups, and expand their reach to empower millions of small businesses across India. These financial intermediaries are not just offering loans; they are becoming partners in the journey of Indian entrepreneurship and innovation.

NBFCs are becoming the backbone of financial inclusion for MSMEs and startups, driving growth, innovation, and economic empowerment. Their tech-enabled, flexible, and inclusive approach ensures that no business, no matter how small, is left behind in the quest for capital and growth. As they evolve, NBFCs will continue to play a critical role in shaping the future of India’s entrepreneurial ecosystem.