Attracting capital is one of the fundamental business priorities for the majority of entrepreneurs. Be it an established entrepreneur of a specific scale, or an MSME entrepreneur or even a fresh startup, raising capital is always a top of the chart affair. In the case of MSMEs, this exercise often gets differently challenging as compared to large-sized organisations.
Historically, this has been an exercise which is either fulfilled by banks or an un-organised category of lenders such as family, friends, unorganised professional lenders.
Due to common banking challenges faced by MSME entrepreneurs, in other decent words, stringent parameters for bankers to lend public money to MSMEs, the life of an entrepreneur often gets tough at the doorstep of any banking institution.
Accessing capital is a legacy problem in the Indian entrepreneurial structure. Now to deal with this problem, alternatives of banks for business lending became a subject of much attraction among MSMEs.
MSME Lending Gap: A Global Challenge
However, MSME finance is a global problem, and as per the findings of the SME Finance Forum, there is a gap of over USD 5 Trillion in MSME Financing. Over 1.3 Million MSMEs which is over 41 % of the total number of MSMEs present in the developing world are struggling with institutional finance. In simple words, 41% of MSMEs are unfinanced in the potential rich developing world.
In India, the situation is even more difficult because there is data which was released by SMEStreet Survey finding which says nearly 34% MSMEs find access to institutional finance as the biggest hurdle for their survival in business. Recent Financial Express Newspaper report published that in India, 47% MSMEs felt the need of alternative finance as they unqualify the norms of MSME Schemes.
The Alternative of Banks for MSME Credit
With the facts mentioned above, it is clear that the importance of Alternative Finance is a critical subject for the growth of MSMEs in India. In the last couple of years, things have significantly improvised in this direction. NBFCs (Non-Banking Financial Companies) have come forward in big numbers to address the financial needs of MSMEs.
Options of Banks
- Stock Market Listing
The Option of Crowdfunding
Crowdfunding is a fascinating subject in the funding space. But, Crowdfunding is highly unstructured in itself as of now, and there is an acute need for proper regulatory guidelines in the same. In India, this concept is under discussion but will take some time to get visible and effective. However, Crowdfunding is gaining momentum in the area of mass-level charity related fundraising. Ketto is a perfect example of this. Yet, in the MSME Funding space, Crowdfunding has a long way to go.
The Option of Stock Market Listing
Yes, a stock market listing is not just limited to large corporates or the so-called blue-chip companies. SMEs are also getting listed in the Indian Stock Markets, and BSE SME and NSE Rise are two significant examples of SME listing platforms for SMEs from top stock markets of India. But the stock market option is limited for those SMEs which are operating in the structured markets and are following proper guidelines for their accounting and finance processes.
However, for MSMEs, the stock market option is slightly an uphill task.
The Option of NBFCs
NBFCs have emerged as the most valid and popular option for MSME Finance. Those MSMEs which are not getting addressed by banks, certainly get their due attention from NBFCs. Government is also working in this space by ensuring the involvement of NBFCs in MSME Lending.
The most significant development happened in this direction when the Ministry of Finance announced the inclusion of NBFCs in the delivery of several Govt led MSME credit schemes. To address the financial issues faced by MSMEs, Prime Minister Narendra Modi’s brainchild Aatma Nirbhar Bharat Abhiyan also has substantial involvement of NBFCs.
Recently RBI has also categorically recognised the role of NBFCs in ensuring involvement and outreach to MSMEs in building the economy.
Since MSMEs are part of the Priority Sector, RBI has issued a fresh notification which even allows Banks and NBFCs to co-lend to potential MSMEs.
Steps to Avail MSME Loans Through NBFCs
Well, NBFCs have taken the lead in the space of MSME Lending. There are many reasons which can authenticate this statement, but a few of them includes; NBFCs’ ability to understand the MSMEs’ business ecosystem in a better way as compared to the conventional banking parameters.
Well, historically, banks have worked on a few fixed parameters. These parameters cannot be amended or changed, and in most cases of MSME lending, they become a hurdle for the banking authorities to approve the needed loan amount to the MSME. But on the contrary, NBFCs have adopted innovative approaches to lend money.
Here are some key differentiators for NBFCs
- NBFCs work on Localised approach.
- NBFCs understand the nuances of local and specific businesses.
For example, working capital loan is a generic term but in case of NBFCs working capital needs of industry sectors like garments manufacturing is different that garment retailing. These innovative approaches also consider contemporary business trends such as machine & equipment financing in a specialised manner.
- Quick Decision making helps in fast delivery of Loans.
- Time criticality is at top priority in MSME Lending.
- More significant Outreach with Enhanced Engagement
- Exclusive or Tailor-made lending offers to MSMEs.
Emerging Role of Fintech
Noval financial technologies popularly known as Fintech have made the entire process MSME Lending fast, secure and effective. Tools like big data analysis, digital assessment, Digital KYC to digital payments all put together have made the entire experience of lending for both borrowers as well as lenders very smooth and streamline.
Some examples of Fintech Led MSME Funding platforms
- INDIFI – www.indifi.com/
- Creditenable – www.creditenable.com/
- Lending Kart – www.lendingkart.com/msme-loan/
Parameters of MSME Lending through NBFCs
Although there are a flexible set of parameters for MSME Lending, ultimately the NBFCs access to ensure the safety and security of money lending.
- Age of the applicant entrepreneur must be over 25 years and less than 65 years.
- Business must show consistent profitability for the last three consecutive years
- Business turnover should reflect upwardly growth.
- An entrepreneur must submit an audited balance sheet by any registered Chartered Accountant.
In addition to the above for MSME Loans, an entrepreneur must have to submit the following documents along with the duly filled loan application:
- Submit a crisp report on explaining how you plan to utilise the expected business loan.
- Photo Identity Proof – Passport Copy/Driving License/Aadhaar Card/ Voter ID.
- A copy of certified & stamped bank statements for the last six months.
- Business proof documents, such as– GST Certificate/Trade License/Sales Tax Certificate/Sole Proprietorship Declaration.
- Partnership Deed/Income Tax Returns along with computation for the last two years/Profit and Loss.
- Statement and Balance Sheet for the previous two years.
Top Challenge in MSME Lending Through NBFCs
Since we discussed and listed out several aspects of MSME Lending beyond institutional banking, we also cannot ignore the challenges faced by MSMEs in getting the MSME loans from NBFCs. The top challenge is the cost of credit. Since MSMEs in general work in a shallow margin business environment, for them, the cost of credit holds importance. As a common perception, MSMEs considers that the cost of credit in NBFCs is higher as compared to banks. However, this statement is partially true, well, the cost of lending in NBFCs is undoubtedly more elevated as compared to any Public Sector Bank (PSBs) which is Govt backed. But if we compare the cost of borrowing between NBFCs and Private banks, the difference is not much.
Top MSME Lenders Beyond Banks
Magma Fin Corp
Aditya Birla Finance