{"id":21553,"date":"2019-07-06T17:00:11","date_gmt":"2019-07-06T11:30:11","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=21553"},"modified":"2021-01-04T11:25:54","modified_gmt":"2021-01-04T05:55:54","slug":"how-nbfcs-solving-credit-deficit-for-msmes","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/how-nbfcs-solving-credit-deficit-for-msmes\/","title":{"rendered":"How NBFCs are Solving Credit Deficit for MSME\u2019s?"},"content":{"rendered":"

In today’s globalized world, every country wants higher growth rate. India is a developing country which has an increasing growth rate. For achieving the current growth rate there are many factors contributed for achieving this milestone. These factors are like 100% FDI in many sectors, huge investment from foreign countries in many forms. But these are only few reasons for such growth rate. In this article we will share how MSME credit deficit problems are solved by the NBFC<\/a><\/strong><\/a>.<\/p>\n\n\n\n

Why MSME’s are facing Credit Deficit? <\/h2>\n\n\n\n

In economy, a major contributor is MSME’s which work on small scales in small cities and districts. It also provides employment opportunities both directly and indirectly. It also focuses on rural employment and enhancing skills and specializations of the people living in farfetched areas of the countries. At present there are close to 5 million MSME’s in the country who is a major contributor of the country’s GDP and exports. It is estimated that close to one third of the India’s GDP comes from these MSME’s.<\/a><\/strong>  <\/p>\n\n\n\n

\"How<\/figure><\/div>\n\n\n\n

Knowing\nall this it is been ignored for many years. As no proper facilities was\nprovided to them like infrastructure facilities, credit facilities etc. Major\nissues facing by these MSME’s is credit deficit and NBFC are trying to bring the\nyoung entrepreneur dream of been a leading businessmen in the society.  <\/p>\n\n\n\n

How NBFC’s are solving MSME’s Credit Deficit\nProblems?<\/h2>\n\n\n\n

In traditional model of lending, generally banks wants to lend to that segment of businesses which has proper books of accounts, accounting<\/a> and audit system as to have an assurance for repayment by them. They had developed a unique system of measuring the credit worthiness of the businesses and accordingly gave loan and advances to the MSME are which was generally short of their requirement.<\/p>\n\n\n\n

But the new aged NBFC’s didn’t use old school techniques for credit worthiness of the MSME’s but uses data analytics and in depth understanding of the industries. The NBFC’s is trying to bridge the gap between the credit supply and demand by the MSME’s.<\/p>\n\n\n\n

<\/p>

The NBFC’s have advanced technology to not only simplify the lending process but also has low borrowing cost and high customer satisfaction.<\/div>\n\n\n\n

One of the major issues\nrevolving around the loan disbursement is that due to many corporate frauds and\nscandals in which businesses after taking loan went insolvent due to which many\npublic sector banks are running in huge losses.<\/p>\n\n\n\n

Due to all this, banks\nhas raised the eligibility criteria for giving loans due to which there was\nvast deficit of credit supply and also small MSME’s owners was not in a\ncondition to fulfill all the eligibility criteria of the banking system. <\/p>\n\n\n\n

Why banks do not prefer lending to MSMEs?<\/h2>\n\n\n\n

There might be a question also that why banks are not taking interest in lending to MSMEs.<\/a><\/strong> <\/p>\n\n\n\n

  1. With the size and amount  of each loan in the MSME sector being\nrelatively small as compared to the huge loans that are been taken by huge\nbusinesses ; <\/li>
  2. That is lack of proper accounting systems,\nnon-updated financials and proper documentations. <\/li><\/ol>\n\n\n\n

    Because of all this\nreason banks don’t show keen interest in lending money to these MSME’s leading\nto credit deficit in the system.<\/p>\n\n\n\n

    What are the ways by which NBFC’s are solving the Credit Deficit Problem of MSME’s?<\/h2>\n\n\n\n

    There are many ways by which NBFCs are solving credit\ndeficit of MSME’s:<\/p>\n\n\n\n

    Reduce Interest Rates<\/h3>\n\n\n\n

    The NBFC’s grant loan on the basis<\/a> of Marginal cost of funds based on lending rate (MCLR), which is regulated by the Reserve Bank of India (RBI) that keeps fluctuating on daily basis. On the other hand, the NBFC’s are not controlled by RBI<\/strong>[1]<\/strong><\/a><\/sup> and they fix their lending rate on their own discretion which is generally less than MCLR. As interest rates play an important role for making investment decision thus it is an important factor for consideration.<\/p>\n\n\n\n

    Fast Processing<\/strong><\/h3>\n\n\n\n

    Traditional form of\nbanking heavily depends on paperwork and has lots of paperwork to be completed\nfor getting loan. But, NBFC’s have advance technology due to which most of the\nwork is done online without having a face to face interaction with the clients.\nThey have less documentation and also understand the customer demand therefore\nclear the loan swiftly without the delays. <\/p>\n\n\n\n

    Less Formalities and Not So Stringent\nEligibility Criteria<\/strong><\/h3>\n\n\n\n

    Due to lesser documentation and formalities the loan can be easily taken. Moreover, the NBFC’s does not have stringent rules and regulation<\/strong> for granting loan to the eligible person. The eligibility criteria are very much less than other traditional banking systems. However, it is to be noted that NBFC’s gives a lot of preference in granting loan to MSME’s with easy eligibility criteria.<\/p>\n\n\n\n

    Traditional banking system gives lot of importance on credit scores. Suppose if a business has less credit score than company benchmark then it may deny them loan. However, in case of NFBC the businesses which has low credit score have high chances of getting loan from NBFC’s.<\/strong> Also, eligibility criteria to avail loan from NBFC’s are quite flexible.<\/p>\n\n\n\n

    \"How<\/figure><\/div>\n\n\n\n

    Conditions\nof Granting Loan to MSMEs <\/h2>\n\n\n\n

    Following are the few conditions which are required to be satisfied for getting loan from NBFC:<\/strong><\/p>\n\n\n\n

    1.  The turnover of the business should be minimum\nRs 10 laths.<\/li>
    2. The ITR of the business should be Rs.2.5 laths\nin the previous years<\/li>
    3. The business should be in operation for at\nleast 2-3 years.<\/li>
    4. The small business owner should own either\nthe business premise or a house.<\/li>
    5. The\nresidence of the business owner should not be used as the small business\npremise.<\/li><\/ol>\n\n\n\n

      Documents\nRequired for Granting Loan to MSMEs<\/h2>\n\n\n\n

      Following are the few\ndocuments required at the time of taking loan from an NBFC’s:<\/p>\n\n\n\n

      1. Address and residence proof.<\/li>
      2. PAN card<\/li>
      3. ITR of the last 2-3 years.<\/li>
      4. Bank statement\nof the past 12 months.<\/li><\/ol>\n\n\n\n

        As already discussed\nthat NBFC is much quicker in granting loans and has minimal documentations as\nlisted above from the traditional loan giving formalities which required much\nmore documents then this form.<\/p>\n\n\n\n

        These are the few NBFCs\nestablished in India which MSME’s can consider while taking loan:<\/p>\n\n\n\n