In recent years, there have been commendable targeted policy initiatives such as
The availability of formal credit for low-income populations is a big challenge and rural areas are underserved. According to
While credit flow at the bottom of the pyramid has improved over the past decade, a huge middle segment is missing. MFIs (Microfinance Institutions) have been important providers of credit to micro-enterprises and individuals through JLGs (Joint Lending Groups).
The MFI segment with an average note size below ₹40,000 has been reasonably served by over 200 institutions with an outstanding loan balance of ₹2.5 lakh crore in March 2021 and growing at 23.8% CAGR (rate compound annual growth rate) in fiscal year 2017-21.
Under the Mudra Yojana, the program to finance unfunded micro and small businesses with loans of up to ₹10 lakh, ₹15.52 crore lakh was disbursed into 29 loan accounts, 55 crore during its 6 years of operation (FY16-FY21), however, the average note size was still low at ₹52,500 during this period.
Micro businesses with a higher credit need of ₹1-5 lakh are a severely underserved segment with only a handful of players targeted. Compared to MFIs’ outstanding loan of ₹2.5 lakh crore, in loans of ₹50,000 to ₹10 lakh, which is a much larger market, the outstanding loan amounts to only ₹1 lakh crore . Micro businesses faced a huge credit gap of ₹8 lakh crore in 2018 according to IFC.
Major issues limiting the flow of credit to this segment include lack of documentation such as Income Tax Returns (ITR), Goods and Services Tax (GST), and adequate bank records. As a result, income assessment issues emerged as major supply-side obstacles. The Pure Fintech model is not suitable as the above data points are lacking and borrowers need support for disbursements as well as collections as many JLG borrowing upgrades.
Nonetheless, the emergence of a handful of new-era non-bank financial companies (NBFCs) is changing the lending landscape by introducing a model that captures the best of fintech and conventional credit characteristics, transforming lending protocols for micro -companies and sole proprietorships. loan requirements.
Unlike traditional banks, new-age NBFCs analyze alternative data for revenue assessment, apply technology more effectively, and have an agile, hands-on workforce. For micro-enterprises seeking commercial loans, the lack of collateral is no longer a major constraint and a good credit rating or good credit history is sufficient.
Given their lending standards more suited to this segment, new-age NBFCs are gaining popularity when it comes to small business lending. Also, NBFCs approve loans much faster than banks and the entire end-to-end process from application to disbursement can be completed within days.
Players in this space with less than 1% GNPA (gross non-performing assets) even after three waves of COVID-19 have proven that, backed by strong underwriting, an efficient collection model and leverage technology, loans to this segment are evolving with a significant impact on the income growth of micro-entrepreneurs.
Given the number of micro and small businesses across India that fall outside the formal financial systems, including the self-employed who remain ineligible for formal credit, new age NBFCs are playing a pivotal role in promoting the goal of inclusive development. Undoubtedly, these digital lending players can serve millions of unbanked sections across India, positively impacting their lives.
The author is co-founder and co-CEO of Moneyboxx, an NBFC.
Disclaimer: The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India.