Micro, Small & Medium Enterprises (MSMEs) require financing for business expansion, growth and working capital. Banks and Non-Banking Finance Companies (NBFCs) are two key pillars of the Indian economy that offer various types of MSME Loans.
A bank is a financial institution licensed to accept public deposits and provide credit. However, Non-Banking Finance Companies (NBFCs) are financial institutions that offer financial services including credit but lack a full banking license. They are governed by the Reserve Bank of India (RBI) and provide a variety of financial products and services such as loans, insurance, and credit facilities. There are several factors to consider when choosing between a Non-Banking Finance Company (NBFC) and a bank for a business loan. Some of these factors include the interest rate, loan amount, repayment terms, creditworthiness and financial stability of the borrower.
Here are some of the benefits of taking an MSME loan from NBFC instead of banks: –
Quick Disbursal Process:
The loan approval and disbursement process are quicker for an NBFC compared to a bank. This is because NBFCs have a more streamlined and eﬃcient process for reviewing and approving loans and can provide a decision more quickly. Also, MSME owners have to submit lengthy paperwork for availing of loans from banks.
Lend to higher risk but promising borrowers:
NBFCs are willing to lend to businesses that are considered risky but have promising future cashflows. This is because most NBFCs work on a pragmatic approach to lending compared to banks and are more willing to onboard higher-risk borrowers in exchange for a higher interest rate.
India has seen a surge in digital lending platforms, reducing the need for paperwork and physical documentation. Both NBFCs and Banks are enhancing their approach and making it more customer friendly. There are NBFCs focusing on going digital from application registration to loan disbursal by using FinTech. This is helping them to reduce the turnaround time and expand their portfolio.
In Tier 2 and Tier 3 cities, there is a large chunk of underbanked Micro, Small and Medium Enterprises (MSMEs). It is an untapped market that Banks are unable to fund due to various limitations like the unavailability of branches near businesses and restrictions in mortgaging outskirts properties. This opens a lot of scopes for NBFCs, whose functioning is not geographically restricted, to provide credit facilities.
Flexible loan terms:
NBFCs can offer more flexible and customized loan terms, such as shorter repayment periods and customized EMI payments to meet the borrower’s specific needs. This can be particularly useful for businesses that need a loan to meet specific, short-term needs.
In conclusion, Non-Banking Finance Companies (NBFCs) have emerged as powerful facilitators of growth and empowerment for Micro, Small & Medium Enterprises (MSMEs) through digital lending. While banks have traditionally been the go-to option for business loans, NBFCs offer several distinct advantages that make them an attractive choice for MSMEs.
One of the key benefits of opting for an NBFC is the quick disbursal process. NBFCs have developed streamlined and efficient loan approval mechanisms, enabling them to make faster decisions compared to banks. This agility is crucial for MSMEs that require prompt access to funds to support their expansion, growth, and working capital needs.
Moreover, NBFCs exhibit a more pragmatic approach to lending, being willing to cater to higher-risk but promising borrowers. This flexibility allows MSMEs with limited credit history or unconventional business models to access financing, which may not be possible with traditional banks.
The following article can be attributed to Mr. Parry Singh, Founder & CEO, Red Fort Capital