NBFCs for an SME-friendly credit ecosystem
SMEs are an essential part of India’s growth story. They not only contribute to our domestic market but also to exports, therefore earning foreign exchange revenue for the country. It is, therefore, making the SME sector rise as a robust pillar in India in terms of GDP and employment. SMEs are contributing more than 38% to Indian GDP, but it can grow to 50% or more if SMEs get more financial support from the government or private financing partners.
The biggest challenge for small and medium businesses in India is raising funds from banks. It is estimated that approximately 16% of the Indian SME sector receives financial support from banks and the rest of them don’t get loans that easily. One of the major reasons for these lacunae is not having a great mechanism, lack of banking guidelines, and policies to evaluate the credit-worthiness of the business.
The existing scenario of the country, which is not great is pushing the Reserve Bank of India to bring in a solid lending policy due to the slow growth of SMEs. Existing policies are conservative with a sky-high interest rate, which is affecting the SMEs in a negative way.
India’s inefficient regulatory framework on lending is a weakness to financial inclusion than an enabler. This makes it difficult for SMEs to not only expand their business but also to run it in tough times when the economy is slow.
In order to ensure that the banking system infiltrates the SME sector more, a new approach to SME financing is required. In this article, we are going to briefly explain the factors that affect the financing system and what is being done about it.
Factors that affect availability of loans
There are basically two factors that affect the availability of easy loans and the nature of the credit facility. The first one is the lending concept which includes primary information source, underwriting policies used in the credit lending business. Another one is the lending structure itself which includes the tax environment, the regulatory environment etc. in which financial institutions operate in India. The policies of the government directly influence the lending technology and the lending system prevalent in the country.
All this lead to a dire need for a hassle-free and easy-to-avail credit system. Gone are the days when banks were the only channel for funding SMEs. Now Non-Banking Finance Companies (NBFCs) are coming up with a new approach using an SME-friendly credit system. They have come to be regarded as important financial intermediaries particularly for the small-scale sectors. NBFCs offer quick and efficient services without
making one to go through the complicated rigmarole of conventional banking formalities. Their concept is to provide collateral-free and customized loans to small and medium businesses in order to bolster their business. Such approach will also help in making the ‘Make in India’ initiative successful.
Little changes can make a big difference
Finance alone wouldn’t be enough for the growth of SMEs; many non-financial issues are equally important for the development of SMEs. We need care & counselling centres across the country for SMEs to provide counselling on schemes launched by the government for them, availability of the market for their products, and a basic need of paper formalities etc.
Originally published at www.ofbusiness.com.