- India’s NBFCs are expected to expand at an annual growth projected at around 18% and total assets likely to approach ₹50 lakh crore by FY27. This growth is being paired with a shift in lending behaviour, as NBFCs adopt risk-calibrated models that place greater weight on an MSME’s cash flows, repayment discipline, and digital traceability.
- Despite MSME lending within NBFC portfolios rising at nearly 32% annually between FY21 and FY24 and pushing the segment’s share from about 5.9% to more than 9%, lenders are becoming more selective due to early stress in unsecured and MSME books.
- Businesses that strengthen formalisation, documentation, and banking discipline will have a clear advantage in this environment, as these factors directly influence how automated credit models assess stability and repayment capacity.
- MSMEs that invest in digital tools, improve credit behavior, diversify operational risks, and build financial buffers will be better positioned to access timely, sustainable financing as NBFCs continue to scale in a more data-driven and disciplined manner.
Non-bank finance companies (NBFCs) are projected to grow by 18% annually, reaching nearly ₹50 lakh crore in assets under management by FY271. This expansion is accompanied by a clear shift in lending behaviour. NBFCs are adopting risk-calibrated models that rely more heavily on borrower data, repayment discipline, and the stability of cash flows. As this shift accelerates, MSMEs are entering a lending environment where access to credit will depend less on speed and more on financial transparency, consistency, and preparedness.
The timing of this transition is significant. A large portion of NBFC expansion over the next two years is expected to come from retail and business lending, including MSME loans. MSME credit has already grown sharply, with NBFC lending to this segment rising at a compound annual rate of 32% during FY21–FY242. Their share of MSME loans has expanded as well, moving from around 5.9% of the portfolio to more than 9%. Even as the opportunity grows, lenders are becoming more selective. Early stress indicators in unsecured and MSME books have prompted NBFCs to examine borrower behaviour more closely, making preparedness essential for businesses seeking sustainable credit.
New Lending Climate MSMEs Must Be Aware of
NBFCs today face the task of supporting credit demand while protecting asset quality. As portfolios expand by ₹7–8 lakh crore each year3, the emphasis is shifting from loan volumes to loan quality. Every credit decision now passes through models that measure consistency, cash flow strength, and repayment behavior.
For MSMEs, this means the traditional reliance on collateral or long-standing relationships is no longer enough. Lenders are assessing stability through bank transactions, digital payments, GST filings, income patterns, and day-to-day financial conduct. MSMEs that demonstrate predictability and discipline will find it easier to access the capital they need.
Why the Lending Is Becoming More Risk-Sensitive
With secured lending making up for 32% of total loan originations (by number of loans) in Q4FY25, lenders are increasingly seeing a rise in the segment. This growth was led by Loan Against Property, with assets under management rising 24% to ₹12 lakh crore4, as businesses prefer to borrow against property or machinery to access stable, lower-cost credit.
At the same time, NBFCs are tightening their assessment frameworks due to early stress visible in parts of the unsecured and traditional MSME portfolios. These include uneven demand cycles, rising input costs, and delays in receivables. This has encouraged lenders to strengthen their assessment frameworks and adopt a more cautious, data-driven approach.
NBFCs are examining cash flows more closely, monitoring banking behaviour, and using digital trails to validate income patterns. Even small irregularities, including sudden dips in balance, frequent short-term borrowing, or higher cheque returns, can influence the risk score.
MSMEs that maintain clear, predictable operations are positioned far more favorably in this environment. Here’s how they can achieve this:
- Formalise as the Foundation of a Low-Risk Profile
A stronger focus on risk has made formalisation a strategic requirement. GST registrations, updated licenses, and clear compliance records create a verifiable footprint that reduces ambiguity in credit assessment. Each document, whether a tax filing or a business registration certificate, helps lenders understand the scale, structure, and legitimacy of the enterprise.
MSMEs that invest in proper documentation signal seriousness and long-term intent. Formalisation improves the accuracy of evaluation models and meaningfully lowers perceived risk.
- Strengthen Collateral Quality and Formalise Assets
Improvements in the nature of collateral offered, such as clearer title, regularly serviced assets, and better-documented ownership, support stronger underwriting. Formalising assets and strengthening collateral quality will enable an MSME to meet the expectations of risk-calibrated lending models
- Strengthen Cash Flow Discipline for Better Credit Access
Cash-flow-based lending is becoming central to MSME credit decisions. Lenders now prioritize stability in regular business operations, making cash flow visibility essential. Crucial practices include maintaining a stable banking trail, which helps lenders understand business activity throughout the month. Predictable billing and invoicing cycles contribute to steady inflows, reducing working capital fluctuations. Minimising cheque returns and avoiding erratic withdrawals demonstrates financial discipline.
When cash flows are consistent, risk models respond positively, improving loan eligibility and strengthening the MSME’s overall financial standing.
- Improve Credit Behaviour to Demonstrate Reliability
Borrower behaviour has become a decisive factor in modern lending. Repayment patterns, credit utilization, and loan-seeking behavior all contribute to borrower assessment.
Timely EMI payments build trust and reduce risk flags. Avoiding multiple parallel loans helps maintain healthy leverage. Limiting frequent credit enquiries prevents the appearance of borrowing stress. Maintaining a long-term relationship with a lender creates familiarity and can lead to better pricing and faster approvals.
Good credit behavior not only improves model-based assessments but also creates opportunities for higher-ticket and long-term loans.
- Preparing Documentation for Risk-Calibrated Lending Models
Automated systems rely on complete and current information. MSMEs that maintain clean, organised, and updated records move more smoothly through the evaluation process. Essential documents include financial statements, tax filings, GST returns, bank statements, property documents, and incorporation or partnership papers.
Missing or inconsistent records create gaps that slow down appraisal and may weaken the borrower’s risk score. Proper documentation is one of the simplest ways for MSMEs to project strength and reduce uncertainty in a risk-calibrated environment.
- Using Digital Tools to Build a Stronger Data Trail
Digital validation is becoming integral to credit appraisal. MSMEs that adopt digital payments, online invoicing, basic ERP systems, or even simple accounting tools create a transparent data trail that reflects business activity accurately. Digital records help lenders assess consistency in revenue, expenses, and customer behavior. They also reduce the time spent on manual verification. Even small steps—such as digital receipts or cloud-based billing—can significantly enhance lender confidence.
- Managing Sector-Specific Risks and Reducing Vulnerabilities
Every industry faces distinct cycles and vulnerabilities. Lenders factor these into their risk models, making it essential for MSMEs to demonstrate resilience within their sector. A diversified customer base reduces reliance on a single client. Avoiding overdependence on a single vendor or raw material source strengthens supply stability. Building financial or inventory buffers during peak seasons helps maintain operations during slow periods.
Smoother operations lead to more predictable cash flows, which in turn improve repayment capacity, which is a key parameter in risk assessment.
- Building Financial Resilience Through Insurance and Contingency Planning
NBFCs value borrowers who can withstand disruptions. Preparing for uncertainties demonstrates prudence and reduces the impact of unexpected shocks.
Simple measures such as business insurance, machinery breakdown cover, and emergency reserves help protect business continuity. Contingency planning for seasonal downturns or market shifts also strengthens stability.
These steps signal resilience and reduce the perceived risk of default, especially in times of volatility.
As NBFCs are poised for strong and steady growth, their lending approach is becoming increasingly selective and data-driven. MSMEs that invest in financial discipline, digital records, predictable cash flows, and responsible credit habits will stand out as strong, reliable borrowers.
By building these capabilities now, MSMEs can unlock timely access to funding, strengthen long-term partnerships with lenders, and take full advantage of the evolving credit landscape. The businesses that prepare early will be the ones best positioned to grow confidently in the years ahead.