Growing Relevance of NBFCs in Driving Micro-enterprises Amid Covid Pandemic

Ondrej Kubik, CEO, Home Credit India

NBFCs (Non-Banking Finance Companies)are proving to be a boon to micro-entrepreneurship in India. They have emerged as a reliable source of finance for micro-entrepreneurs who engage in income-generating activities and impact livelihoods in both rural and urban geographies.

As per industry reports,the microfinance industry’s gross loan portfolio (GLP) grew 10.1% to Rs. 2,32,648 crores as of December 31, 2020. NBFCs accounted for a 9.06% share of the micro-finance industry’s gross loan portfolio (GLP) that stood at ₹2,11,302 crore at the end of December 2019.

Covid Impact

The second wave of the coronavirus pandemic has severely hit the Indian labor market erasing lakhs of jobs. It has led to a sharp increase in the number of people who are not actively looking for employment opportunities despite job losses.

As per Centre of Monitoring Indian Economy (CMIE) data, the number of employees, both salaried and non-salaried, fell from 39.81 crores in March 2021 to 39.08 crores in April 2021. This indicates that the second wave of the Covid pandemic left 73.5 lakh jobless in the month of April alone.

In the wake of a sustained economic crisis and fewer job opportunities, these unemployed men and women are more likely to seek a return to work as self-employed people by turning their skills into businesses of their own. This is in line with the global trend where economic downturns have provided fertile ground for micro-entrepreneurship.

Financial Challenges Faced by Micro-enterprises

Micro-enterprises are understood to have maximum impact on the economy, and rightly so. The sector contributes 30% to India’s GDP and has an innate capacity to create more job positions, bring wealth on a local level through income generation activities besides opening the way for more businesses to grow.

According to estimates, MSMEs in India employ 30 million people and have the potential to create 50-60 million jobs in the next few years. This has been further vindicated by the International Labour Organization (ILO) study which observed that micro-enterprises together account for 70 percent of total employment in a developing country like India, making them by far the most important drivers of employment.

Despite the benefits that micro-enterprises accrue to the economy, there are limited finance options available for them from the formal financial sector. This is due to the high risk associated with such entrepreneurial ventures, the looming NPA crisis over India’s banking sector, stringent loan conditions, and systemic issues gripping our formal financial sector.

This puts the onus back on the NBFCsto break down these barriers and provide adequate financial support to the new breed of accidental entrepreneurs to start and grow their micro-enterprise. NBFCs,specializing in extending small collateral-free loans to low-income groups, must walk the extra mile to bring micro-enterprises, hit by the pandemic, on course and ensure their sustainability by supporting the existing borrowers who are struggling to pay back their dues.

Strong Fundamentals

NBFCs in India,despite some recent setbacks,have reasonably strong fundamentals. They have continued to disburse credit to micro-enterprisesto improve livelihoods and incomes despite prevailing Covid-19-led uncertainty which is impacting the repayment capability of small entrepreneurs.

Amid Covid, NBFCs have strictly adhered to credit discipline, enhanced customer engagement, and sensitized staff on fair practices code to restore consumer confidence in borrowers, keep the credit cycle intact, and avoid instances of over-lending. Rapid technology adoption that greatly improved the operational efficiency of NBFCs has also helped in minimizing event-based disruptions, predicting portfolio behavior, building risk models, and designing customer-centric products.

Additionally, NBFCs have benefitted from the liquidity measures undertaken by the Reserve Bank and improved market financing conditions that helped them to raise funds, preserve business continuity, and build enterprise resilience amid pandemics. This is besides government-run social protection schemes that are playing an important role in alleviating the distress of low-income rural and urban households who avail credit facilities from NBFCs.

Aiding Micro-entrepreneurs

NBFCshave long been a lifeline to micro-small enterprises in India. Over the years, NBFCs have come up with innovative financial services to bridge the gap between the formal financial sector and the financial needs of micro-entrepreneurs in rural as well as urban areas, and lower-income households. Armed with innovative ways to check the credit risk profile of entrepreneurs, NBFCs have been able to provide collateral-free entrepreneurial loans quickly and at an attractive interest rate to small businesses with less paperwork.

To further address the unique challenges of micro-enterprises, NBFCs have come up with unique features like overdraft protection, Flexi benefits such as the facility to withdraw and repay depending on the business’s cash flow to give them easy access to such loans. This is in addition to increasing their network in Tier-2, Tier-3, and Tier-4 markets and embracing digitalization to enhance the reach and provide a seamless 24*7 customer satisfaction experience.

NBFCs also possess a deep understanding of the problems faced by micro-entrepreneurs. And towards this end, they have been imparting various skill development training programs to enhance the self-confidence of the borrowers and make them competent in undertaking business activities and hence generate sustainable livelihood opportunities.


The role of NBFCs in supporting micro-enterprises, which is the real growth engine of the Indian economy due to their excellent capacity for job creation and sustainable development, cannot be emphasized enough. NBFC-led revival of India’s labour-intensive micro-enterprise sector could represent the cornerstone of India’s economic recovery. They must utilize the lessons learned from the past and work towards transforming the pandemic into new possibilities for micro-businesses.

Views expressed in this article are the personal opinion of OndrejKubik, CEO, Home Credit India.

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