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NBFCs expand MSME portfolios

An increasing number of non-banking financial companies (NBFCs) are looking to tap the MSME segment as competition from banks has intensified in vehicle, gold and home loans. Muthoot Finance on Tuesday launched small business loans to plug the gap of credit access to the MSME segment. “From a business perspective, we are venturing into this initiative as part of our strategic expansion plans and diversification, aiming to become a one-stop finance services provider,” says MD George Alexander Muthoot. “We are offering ticket sizes ranging from Rs 1-10 lakh, which are typically easy for SMEs to repay.”

Shriram Finance is looking to expand its MSME operations. Executive vice chairman Umesh Revankar believes that the share of MSME loans will increase to 15% of its portfolio in three years, from 10.3% currently. In recent times, NBFC interest in the MSME segment has also been fuelled by sustained demand from small enterprises for credit. A strong government impetus to grow MSMEs and initiatives like Emergency Credit Line Guarantee Scheme, credit guarantee scheme for micro and small enterprises and Pradhan Mantri Mudra Yojana have expanded the presence of formal credit to the segment, say experts.

Fresh unsecured business loans by NBFCs rose 24% YoY to Rs 33,915.3 crore as on March 31, latest data by Finance Industry Development Council and CRIF High Mark showed. A report by TransUnion CIBIL and Sidbi shows that more MSMEs are preferring NBFCs for their financing needs.

“Firstly, NBFCs can process and disburse loans much faster than traditional lenders. Lower turnaround time is crucial for MSMEs that often need quick access to working capital,” Nishith Maheshwari, head – partnerships, SME business loans, InCred Finance, said. Since NBFCs require minimal documentation from borrowers because they assess creditworthiness differently, the underwriting process becomes more efficient due to preset industry-specific policies.

Flexiloans.com co-founder Manish Lunia believes that fintechs and NBFCs enjoy success in this segment due to their differentiated underwriting and “well-entrenched” branch networks. Broadly, these entities are able to assess cash-flow and repayment ability of MSMEs in a far better manner than banks.

“The general hypothesis is that MSMEs are not credit worthy. I am telling you that has changed. We are now looking at MSMEs through the eye and lens of data, similar to how the consumer finance segment is assessed,” says U GRO Capital MD Shachindra Nath.