Tech-Enabled NBFCs Empowering MSMEs with Supply Chain Financing Solutions

Nirav Choksi

In India’s technologically advanced lending ecosystem, the Non-Banking Financial Companies (NBFCs) have found a new role to play. As per RBI’s financial stability report, there’s a noticeable change in the credit distribution pattern of banks and NBFCs in India. A considerable portion of credit allocation is now directed towards the service sector and retail loans.

Interestingly, even though private banks hold a formidable position in the digital lending ecosystem, NBFCs account for a higher proportion of lending via digital channels. This amounts to more than 10 per cent compared to banks (~0.2-0.3 per cent).

Over the last five years, NBFCs have come to the forefront in driving new credit disbursals to businesses that have traditionally remained unserved or underserved by banks. Additionally, owing to their tech-enabled offerings, lean cost structures, and differentiated business models— NBFCs are well-positioned to take advantage of the market opportunity and reach credit-starved segments like the Micro, Small, and Medium Enterprises (MSMEs).

The exponential growth of MSMEs in recent years has unlocked new supply chains and distribution channels across the country. By leveraging advanced technologies and innovative approaches to assess creditworthiness, NBFCs are boosting the credit flow to MSMEs in India—and are increasingly becoming the go-to lender for the sector. NBFCs are also leaning towards digitsed supply chain financing solutions to support the growth of new-age supply chains.

Also Read | Way forward for NBFCs while thriving in the digital era

Bridging the credit gap in India’s new-age supply chains

Even with the ongoing spate of inflationary trends across the globe, India has emerged as a stronger and more resilient global player.

With a promising trade and commerce landscape, India is on the cusp of a supply chain transformation. We are witnessing a riveting evolution of digitisation across the supply chain ecosystem in India.

To give you a bit of background on the current supply chain landscape in the country, major manufacturing industries, and retail aggregators are establishing connections with suppliers nationwide. Most of these suppliers are MSMEs who often face acute credit and working capital challenges.

With India’s exports projected to reach USD 450 billion by the end of this fiscal year, MSMEs need to be financially viable to meet the expectations on the export front. With India on track to achieve the bigger target of USD 1 trillion in exports by 2030, opening up new avenues of easily accessible and low-cost credit for MSMEs has become an urgent priority.

In fact, working capital financing gaps stand out as the major roadblock inhibiting growth and choking small suppliers operating at deeper supply chain tiers.

Tech-led NBFCS are breaking ground in supply chain financing

India’s addressable supply chain finance market is estimated to be around INR 60,000 crore. By facilitating intuitive and automated decision-making, reducing turnaround time, and improving the accessibility of financing for MSMEs—NBFCs are stepping up to scale up efficiencies in the supply chains across the nation.

As per a report by PwC, the NBFC lending book has grown by 18 per cent. A deep understanding of target customer segments drives this spike. The growing digital trail of data and technological advancements in cloud computing and big data analytics have spurred the development and distribution of innovative financial services products.

In addition to reducing cost-to-serve and a greater ability to launch new products quickly, NBFCs provide quicker verification processes with customised loan offerings to cater to MSME needs more efficiently and strengthen supply chain resilience.

The need to leverage digital operating models

NBFCs today realise that they need to move beyond conventional approaches to attain new levels of agility and precision in credit risk assessment. A strong the digital core is crucial for NBFCs to optimise operations and reach a new performance frontier.

According to a report by EY, the share of NBFC digital disbursements has risen to 32 per cent in FY22, up from a mere 6 per cent in FY17. In the highly competitive lending landscape, NBFCs are adopting a loosely coupled tech architecture to scale up efficiently. Furthermore, NBFCs are building tight information security controls to ensure insulation from rising threats.

We now see digitally-forward and disruptive NBFC lenders taking a personalised approach to underwrite. They incorporate segment-specific policies that leverage alternative data sources and apply scorecard-based credit decisions.

The digital transformation imperative for NBFCs is opportunity-rich, considering the growing network of supply chains in the country. Accelerating digital transformation initiatives and leveraging technology-based tools will help NBFCs transform underwriting and decision-making and develop a competitive risk management framework. Compliance management is a labor-intensive and paperbased process that cannot be easily scaled. This simply means that digital tools and operating models must be adopted to mitigate risks and build a transparent and timely compliance ecosystem.

Also Read | NBFCs Fully Equipped to Navigate the Road Ahead for Commercial Vehicle Financing

To facilitate intuitive and automated decision-making, NBFCs are becoming AIfirst organisations. Credit ratings assigned by AI and ML have an accuracy of 98 per cent. From enhancing customer service, simplifying compliance, and standardising processes, AI and machine learning models are also known to improve debt recovery, fraud detection, and risk management.

Future-proofing the NBFC sector

The growth of NBFCs depends primarily on how well they can optimise technologies and available resources. If we look at the NBFC sector, in the last 5 years there has been a consistent growth of 5-10 per cent. The growth is nearly doubling every three years.

With technology defining a new paradigm for NBFCs, success will hinge on their ability to nurture partnerships with key stakeholders such as banks, FinTechs, and regulatory bodies.

One of the primary obstacles for NBFCs is identifying the most viable technological advancements to incorporate into their operations. We also need to consider the complexity and siloed nature of NBFCs that limit them from effectively enabling digital transformation. In such instances, NBFCs can collaborate with FinTechs considering how these new-age entrants are better equipped with cutting-edge digital solutions in terms of onboarding, underwriting, and credit scoring.

Views expressed by Nirav Choksi, CEO & Cofounder at CredAble

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