NBFCs and Microfinance: Empowering SMEs at the Grassroots

Small and Medium enterprises are the heartbeat of the Indian economy and one of the primary drivers of our industrial sector. SMEs are the key sources of employment and entrepreneurship with an estimate of over 120 million employed in this sector and contributing to more than 30% of India’s GDP and 40% of exports. This industry not only opens employment opportunities but also boosts rural and backward areas, making it an important aspect of India’s socio-economic growth.

NBFCs and Microfinance institutions particularly in developing countries like India, have a substantial impact on poverty alleviation and economic development. They meet SMEs’ financial needs and contribute to their growth and expansion in various ways.

MFIs and NBFCs assist SMEs and small businesses through:
• Easy Access to Credit

These institutions are the principal source of financing and lending for SMEs. They provide loans to low-income individuals as well as small and medium-sized businesses. Accessing such loans is quite simple when compared to the official banking sector. They offer loans at reasonable interest rates with simplified procedures and minimal documentation requirements, allowing SMEs to acquire the essential financial assistance.
• Inclusive Policies

They focus on the growth of small businesses that employ unskilled and semi-skilled labor, particularly those from economically disadvantaged communities. They create inclusive policies and simple business models to boost the economic development of these businesses. These institutions help to empower and uplift underprivileged groups by providing financial services to under-represented people.
• Assistance with business growth

They play a critical role in assisting SMEs with their expansion goals. They offer advice, help, and financial choices for business expansion. SMEs can increase the number of outlets, diversify their product offerings, and become more competitive in the market by gaining access to funds from MFIs and NBFCs. This not only benefits SMEs but also assists these financial institutions in recovering their loans and lending to more ambitious entrepreneurs, encouraging a cycle of growth and economic progress.

Comparably, NBFCs have emerged as critical financial intermediaries in bridging the credit gap for SMEs. They play an important role in providing much-needed access to funding for these businesses, which frequently struggle to acquire loans from regular banks due to a lack of collateral or a significant credit history.

NBFCs create financial products that are tailored precisely to the needs of SMEs. These products may include unsecured loans, working capital loans, equipment financing, and trade finance solutions. This customization makes it easier for SMEs to obtain the finance they require. Another advantage is that the NBFCs often have shortened approval processes, allowing them to get loans more quickly than traditional banks. This quick access to funds is crucial for meeting urgent business needs and capitalizing on growth prospects.

Many NBFCs provide variable payback arrangements to match the cash flow dynamics of small businesses. This flexibility eases the load on them and allows SMEs to manage their finances more effectively. Additionally, NBFCs use novel credit evaluation methodologies such as data analytics and digital lending platforms to evaluate the creditworthiness of SMEs. This enables them to lend financing to enterprises with minimal credit records.

Challenges and the Way Forward:

While NBFCs and microfinance institutions have made tremendous progress in empowering SMEs, we cannot deny that certain challenges persist. Among these are regulatory compliance, budgetary limits, and the need to find a balance between profitability and social effect. To overcome these challenges and further enhance their impact on SMEs, NBFCs, and microfinance institutions must:

1. Accept financial solutions and digital platforms to cut operational expenses, improve efficiency, and reach a larger audience.

2. Implement strong risk assessment and management practices to secure the long-term viability of their business and to keep investors and regulators trusting them.

3. Collaborate with other financial institutions, government agencies, and non-profit organizations to pool resources and knowledge for broader outreach and impact.

All in all, NBFCs and microfinance institutions are critical partners in the mission to empower SMEs at the grassroots level. Their capacity to deliver specialized financial products, instant lending access, and flexible payback terms fill a vital need in the financial ecosystem. As they continue to innovate and expand their reach, these institutions play an important role in fostering economic growth, eliminating poverty, and creating a more equitable financial landscape. Empowering SMEs benefits not just the businesses themselves but also the broader prosperity and growth of nations.

The author is MD & CEO, Niyogin Fintech Ltd. Views are personal.