NBFCs Lending to Small Businesses to See $15 billion Deal Flow by FY33

Swetha Dhinesh

27 May, 2024

Based on the strength of regulatory advantages, technology advancements, and maturing balance sheets, non-banking financial companies (NBFCs) offering micro, small, and medium-sized enterprises (MSMEs) small-ticket loans are predicted to record deal flow of more than $15 billion over the next ten years. It is a ten times growth over the equity deal flow of $15 billion during the previous ten years.
Given the favourable conditions, standalone, small ticket lenders have a deal flow potential of up to $15 billion over the following ten years—a ten times increase over the previous decade. Even while the MSME sector contributes significantly to the nation’s economy, making up around 30% of the GDP and employing over a fifth of the population, the report emphasises the urgent need for more financing choices. The development of the small businesses sector is even more important as the country works to become a $10 trillion GDP economy.

Non-Banking Financial Companies

A Non-Banking Financial Company is a business registered under the Companies Act and engaged in lending loans and advances, buying government-issued securities like shares, stocks, bonds, debentures, securities, etc. or other securities with a similar marketability, leasing, hire-purchase, insurance, and chit business.

According to section 45-I(f) of the Reserve Bank of India Act, 1934, a Non-Banking Financial Company refers to one of the following: 

• A financial institution, which is a company; 
• A non-banking institution is a company that has as its primary business of receiving deposits under any scheme or arrangement or in any other manner or lending in any manner;
• Any other non-banking institutions, or a group of such institutions, as the Bank may define by notification in the Official Gazette and with the prior consent of the Central Government.

NBFCs lending to small businesses

Every year, NBFCs in India extend more loans than banks do, and even after entering riskier sectors, their bad debt percentage is lower, and their profitability is higher than banks’. As a result, NBFCs are crucial for providing financing to all credit market segments, including micro, small, and medium-sized businesses (MSMEs). NBFCs have taken a sizable bite out of this market, which was previously dominated by public sector banks virtually exclusively.

Ways in which NBFCs benefit small businesses

NBFCs have assisted countless business owners in realising and fulfilling their ambitions. Let us examine the ways in which small businesses are benefitted from NBFCs.

Less lending rules and regulations – NBFC lending standards and regulations are less stringent than those for banks because they fall under the Companies Act. This makes it simpler for borrowers to get loans. The less complicated loan processing has greatly pleased the borrowers.

Minimal Paperwork and Documentation – Due to the minimal paperwork and documentation required by NBFC loans, more people choose them over bank loans, which can have strict requirements for document approval. Banks may only accept your loan application if you provide the required documentation. But, NBFCs handle business loans more quickly than banks and require less paperwork.

Quick Processing – Applicants must meet the eligibility requirements established by banks. However, NBFCs are compliant in this regard. It makes the process quicker and simplifies the loan approval procedure. Most frequently, consumers ask for business loans when they urgently need money. Financial institutions saw an opportunity to meet demand by processing NBFC loans quickly and at a low-interest rate. In reality, borrowers are ready to compromise on interest rates if the loan amount is large and can expect quick approval.

Favouring Borrowers With Low Credit Scores – Banks adhere to strict regulations and ensure the borrower has a strong credit rating due to the risky nature of a company with a low credit rating. NBFCs will offer and approve small business loans even if the applicant has a low credit score. But, in this case, you might need to pay a higher interest rate to offset the default risk.

Reasonably Low-Interest Rates – The interest rate is a business loan’s main consideration. NBFCs have started to concentrate on this market. Borrowers find this to be simpler and more affordable when the interest rate is decreased in addition to all other benefits. As a result, debtors’ EMIs are reduced. The interest rate paid to the borrowers is competitive but depends on their credit score, income, and ability to repay. 

NBFCs lending to small businesses to see $15bn deal flow by FY33

According to an investment banking franchise’s prediction, Non-banking finance companies (NBFCs) that lend to small businesses will see a $15 billion deal flow in the next decade. This growth is ten times the deal flow this segment saw in the previous decade. Let us understand the reason why NBFCs have been lending to small businesses recently.

• According to the survey, just 14% of India’s 6.4 crore MSMEs have access to loans. Their expected overall financial need is $1,955 billion, of which $1,544 billion is in debt. The market size is projected to be $819 million, of which only $289 million is satisfied by formal credit, taking into account that slightly more than half of this demand comes from viable enterprises.

• It is believed that MSMEs are the foundation of our economy and that their expansion is essential for us to reach a GDP of $10 trillion. Yet, a significant credit gap of more than $500 billion, of which more than $100 billion is for the small ticket loan category, is a significant barrier for this industry.

• NBFCs are in a stronger position than banks due to their extensive presence and low-cost branches. Also, they perform better at finding clients and determining client repayment capacity. NBFCs are prepared to understand and assess an unregulated sector and have their own collection team, in contrast to banks, which favour safe customers. Also, they excel at Tele verification, technology-related cash flow recognition, and document retrieval.

• High-calibre, specialised NBFCs that are quick and nimble are filling this credit gap. This section is ready for a positive cycle. Operating expenses will decrease as the market ages and the balance sheets are stronger. This will result in rationalised funding costs. Lenders in this market will be able to sustainably achieve a 20% return on equity when it enters a positive cycle.

The Procedure for Applying for Business Loans from Non-Bank Financial Companies

The following steps are involved in the process of obtaining business loans from NBFCs:

• Prior enquiry of various NBFCs’ lending strategies is a must. Give it a try if they accept online applications. Otherwise, you can visit the NBFCs’ offices or request a meeting with one of their representatives to learn more about the loan options.
• Once you’ve chosen your NBFC, they’ll assist you with the list of “necessary documents” and explain their qualifying requirements.
• After that, complete a loan application and attach all necessary documents.
• NBFCs check the information provided in the application form. Additionally, they might request a one-on-one meeting to discuss the borrower’s company goals, plans etc.
• NBFCs authorise the loan and begin the sanctioning process if they are satisfied. The terms are agreed upon if the loan is to be paid back in instalments.
• In the event that the entire loan is disbursed at once, the NBFCs park the funds in the borrower’s bank account following the necessary verification.

The loan approval and sanctioning procedure has grown very quickly in recent years due to technologically advanced alternatives. NBFCs give business loans as fast as possible, enabling companies to carry out their expansion or start-up plans without worrying about the necessary funding.

Conclusion

With the steady improvement of NBFCs, obtaining business loans is no longer difficult for start-ups or small businesses. The emergence of NBFCs in small business financing has created new opportunities for companies whose growth would otherwise remain stuck by the lack of readily available financing. This sector is projected to experience a deal flow of almost $15 billion in the next ten years, which is about ten times what we have seen in the prior ten years due to solid balance sheets and ongoing equity infusions.

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