The Indian government plans to pump in approximately $134 billion into infrastructure development for large, micro, small, and medium enterprises across sectors in FY 2024-2025. With machinery as a vital infrastructure component supporting the nation’s $5 trillion economy goal for FY 25-26, the increased focus shines a spotlight on machinery loans, too.

Why the emphasis on machinery finance? Because it keeps the wheels of MSMEs running. In 2023, products manufactured by MSMEs accounted for over 45% of the country’s total exports. To maintain this contribution level, these businesses require access to efficient equipment and machinery loans that can provide the necessary financial resources.

NBFC’s Role in Machinery Finance & MSME Growth 

Recognizing the growing demand for credit in the MSME sector, NBFCs have significantly expanded their MSME loan portfolios of late. Data from the Reserve Bank of India (RBI) shows that credit growth to MSMEs by NBFCs was over three times faster than that of banks in March 2023. Furthermore, NBFCs registered a credit growth of 42.4% to MSMEs compared to traditional banks’ 12.4%.  

This surge in NBFC lending has played a critical role in empowering MSMEs, particularly in acquiring crucial machinery to fuel their growth. As we look towards the future, this trend of financial innovation is set to combine with new technology to create a more digital and data-driven system for machinery finance.  

Key Trends Shaping the Future

Here are some key trends that make the future of machinery finance promising.  

1. Rise of Digital Platforms

Digital platforms are revolutionizing traditional lending models, bringing efficiency and personalization to machinery finance through:

• Data-Driven Decision-Making: Big data analytics are revolutionizing credit assessment. Lenders can analyze vast datasets of historical performance and equipment usage to evaluate a business’s creditworthiness accurately. This data allows for faster loan approvals and tailored financing options based on individual needs.

• Real-time Insights: Access to real-time data on equipment usage enables lenders to design financing solutions aligned with a business’s specific operations. It’s almost like a loan that adjusts payments based on the actual equipment usage, offering greater flexibility for borrowers.

However, as digital platforms collect sensitive financial and operational data, ensuring strong data security and privacy is crucial. Lenders must adhere to strict regulations and implement advanced security measures to protect customer information.

2. Flexible Financing Options 

Lenders are moving away from a one-dimensional approach, offering a wider range of financing options to cater to different industries and business needs: 

• Industry-Specific Solutions: Different industries have unique equipment requirements and cash flow cycles. Lenders recognize this and craft customized financing solutions. For instance, a construction company seeking heavy machinery will likely require different loan structures than a bakery needing an industrial oven. So, while traditional banks might offer one-size-fits-all or rigid loan structure with a fixed interest rate, standard repayment term, and high down payment, NBFCs can tailor their machinery loans to specific needs. This could include a lower down payment using the machine itself as collateral, flexible repayment schedules aligned with production, and extended loan terms to make the high cost of machinery more manageable. 

• Pay-as-you-go Models and Outcome-Based Financing: Businesses increasingly seek flexible payment options that align with their revenue streams. Pay-as-you-go models allow borrowers to spread payments based on equipment usage, while outcome-based financing links loan repayments to the success of the project or equipment’s performance. These models offer greater financial control and minimize upfront costs for businesses. 
   

• Leasing and Rental Options: Ownership isn’t always the most practical option. Leasing and rental models provide businesses with access to the latest equipment without the burden of full ownership. This allows companies to adapt to evolving technological advancements and market demands. 

3. Sustainability Focus 

Environmental consciousness is no longer a fad; it’s a core business consideration. The future of machinery finance reflects this shift toward sustainable practices: 

• Energy-Efficient Machinery: Financial institutions are likely to incentivize and prioritize loans for energy-efficient machinery. This benefits the environment and reduces a business’s long-term operational costs. Green financing options, with lower interest rates and extended loan terms, will encourage businesses to invest in sustainable equipment. 
   

• Government Initiatives: Governments worldwide are actively promoting sustainable practices through subsidies and tax breaks. Businesses that adopt energy-efficient machinery can benefit from these incentives, making sustainable choices financially attractive. Aligning with these environmental goals ensures future-proofing and promotes long-term business viability. 

Predictions for the Evolving Landscape 

Looking ahead, several key trends will continue to shape the landscape of machinery finance in India: 

• Integration with the Internet of Things (IoT): As machinery becomes increasingly interconnected, real-time data on performance, maintenance needs, and usage will become readily available. Lenders can leverage this data to assess risk more accurately and personalize financing solutions further. 
   

• Blockchain Adoption: Blockchain technology offers enhanced transparency and security in financial transactions. Smart contracts, self-executing contracts triggered by predefined conditions, could revolutionize the machinery finance process, streamlining loan approvals and ensuring secure payments. 
   

• Increased Competition and Consolidation: As the market becomes more lucrative, we can expect a rise in new players entering the machinery finance space, leading to greater competition. This could lead to mergers and acquisitions, with smaller lenders consolidating to remain competitive. 

Conclusion 

The future of machinery finance in India is bright. By embracing digitalization, sustainability, and flexible financing models, lenders empower businesses to access the necessary equipment to grow and flourish. Businesses that adapt to this evolving landscape and prioritize sustainable practices will be well-positioned to thrive in future years.