India’s Micro, Small, and Medium Enterprises (MSMEs), though modest in scale compared to the Large Enterprises, are the unsung heroes of our economy. They contribute a significant 29.15% to the country’s GDP and 45.56% to exports, while creating over 15.50 crore jobs. These promising entities, recognized as India’s growth engines, face a critical hurdle: accessing credit for various aspects of the business, including working capital, equipment and machinery, hiring talent, inventory purchase, business expansion, and general technology upgrading. The RBI’s Expert Committee recorded an overall credit gap of Rs. 20 to Rs. 25 trillion, hindering their potential to access newer infrastructure and technology and develop as organizations.

While traditional lenders like banks have stringent requirements, Non-Banking Financial Companies (NBFCs) often offer a lifeline to innovative MSMEs through flexible loan products.

Credit Challenges MSMEs Face

Traditional financial institutions would rather bet on a tried-and-tested idea that is sure to succeed and recover their money. MSMEs buzzing with innovative ideas, on the other hand, face numerous challenges:

  • Short-Term Loans: Traditional institutions often have short repayment terms, which make them unsuitable for the long-term research and development (R&D) projects or development cycles that innovative MSMEs usually require.
  • Collateral Requirements: Banks usually require high collateral against loans. New ventures typically lack the land, buildings, or other tangible assets these institutions demand as security.
  • Risk Aversion: Banks exhibit risk aversion towards innovative ventures with unproven business models and limited financial history after checking their CIBIL score, making it challenging for MSMEs with fresh ideas to secure funding.
  • Long Loan Processing Times: The traditional loan application process is usually long-drawn and cumbersome, delaying access to much-needed capital for MSMEs seeking to capitalize on innovative emerging opportunities.
  • Lack of Understanding: Traditional lenders may not fully appreciate the innovative business models’ potential, preventing them from assessing the idea’s true value.

How NBFCs Bridge the Gap:

While traditional lenders may not fund MSMEs, the latter aren’t left out in the cold. With a more flexible and adaptable approach to financing, NBFCs step in for innovative MSMEs. Many commercial banks also have subsidiary NBFCs that provide MSMEs with the needed shot in the arm with their broad reach and robust financial backing. Some even offer unsecured growth capital to entrepreneurs with specific needs, such as women or people with disabilities. Here’s how:

  • Flexible Loan Products: NBFCs understand the unique needs of innovative MSMEs with solid growth potential and offer a broader range of products tailored to their specific requirements through their loan app or by visiting the institution. These include:
    • Revenue-based funding based on future projected revenue stream to access capital without pledging assets
    • Venture debts designed for innovative ventures, which may have steeper rates of interest and longer repayment terms for longer-term financing needs of R&D and product development.
    • Features like invoice discounting, trade finance, expertise in customer services, equipment finance, etc.
    • Unsecured loans, even without traditional collateral
  • Gauging Potential: NBFCs often employ a more holistic approach to credit evaluation. They go beyond traditional creditworthiness factors and consider an MSME’s innovative idea, future growth prospects, and the potential impact of their venture. This allows them to identify and support promising businesses with disruptive ideas.
  • Tech-Driven Solutions: NBFCs are increasingly adopting innovative technologies (data analytics and machine learning algorithms) to assess creditworthiness more efficiently and accurately. They can thus make faster and more informed decisions about financing innovative ventures, even with limited financial history.
  • Mentorship and Guidance: NBFCs are usually customer-centric and understand the unique needs of MSMEs. Not only do they guide with the right and tailored business loan and repayment options but some also provide mentorship and guidance beyond financing, including support with financial management, business planning, and navigating the complexities of scaling an innovative venture. This holistic approach empowers MSMEs to secure funding and build a strong foundation for success.

Innovative MSMEs Benefiting from A Solid Support System

MSMEs in India are proving to be a hotbed of creativity, constantly coming up with new ideas and solutions. Interestingly, besides their ingenuity, most of these are designed to be beneficial to ecology or communities.

Here are some exciting areas where Indian MSMEs are making waves through innovation and giving the nation something advantageous:

  • Agritech: Whether through smart irrigation systems, agriculture techniques, or online marketplaces for farmers, MSMEs are revolutionizing the agricultural sector. For example, some, even an agritech startup, provides AI-powered tools to farmers to improve crop yield and manage resources efficiently.
  • Waste Management: With growing environmental concerns, MSMEs are developing innovative solutions for waste management. This includes technologies for waste segregation, recycling, upcycling, and manufacturing of eco-friendly disposable cutlery made from plant-based materials.
  • Cleantech: MSMEs are contributing significantly to India’s clean energy goals by developing affordable solar panels, biofuels, and energy-efficient appliances, making clean energy accessible to a wider audience.
  • Manufacturing: MSMEs are leveraging technology to improve efficiency and product quality in manufacturing. This includes using 3D printing for rapid prototyping, adopting automation techniques, and implementing Internet of Things (IoT) solutions for real-time monitoring and control.
  • Handicrafts and Textiles: MSMEs are also revitalizing the traditional handicraft and textile industries by incorporating modern designs and digital marketing strategies. Think preserving cultural heritage and expanding the market reach for these beautiful products. Many source their products from artisans across India, promoting traditional crafts while catering to contemporary tastes.

The buck doesn’t stop at these. Hardwater solutions, aerospace, shape-shifting backpacks, or waterless technologies, the sky is the limit for these enterprises regarding innovation.

By offering flexible loan products, CIBIL score check and other features, NBFCs empower individual businesses and contribute to the overall economic growth and job creation in India. As the MSME landscape continues to evolve, NBFCs are well-positioned to be a key partner in propelling India’s innovation engine forward.