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Tata Capital > Blog > Why NBFCs are Expanding their Lending base to MSMEs

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Why NBFCs are Expanding their Lending base to MSMEs

Why NBFCs are Expanding their Lending base to MSMEs

Micro, Small, and Medium Enterprises (MSMEs) have contributed hugely to India’s GDP. MSMEs are enterprises that are defined by the size of their investment, as follows:

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  • Micro – Rs 25 lakh
  • Small – Exceeds Rs 25 lakh but is less than Rs 5 crore
  • Medium – Exceeds Rs 5 crore but is less than Rs 10 crore

Unlike large firms, MSMEs are typically smaller-sized businesses. This makes it difficult for them to get large sums as funding. However, many MSMEs have recently been placing their trust in Non-Banking Financial Companies (NBFCs) and availing loans from them. The popularity of NBFCs is no secret as they, along with housing finance companies, cumulatively lent Rs 2.59 lakh crore to commercial enterprises helping all of them meet 18% of their financial needs in the financial year 2017.

NBFCs are financial institutions that offer certain types of banking services such as loans, credit facilities, money markets, merger activities, retirement planning etc. but they do not have a banking licence. Hence, they do not accept deposits or issue drafts/cheques, etc.

Here are some reasons why NBFCs are a preferred source of borrowing among MSMEs.

1. Competitive interest rates

The interest rate is a prime factor that any businessman would consider while applying for a loan. Interest rates offered by banks fluctuate on the basis of the Marginal Cost of funds-based Lending Rate (MCLR), which in turn depends on lending rates set by the Reserve Bank of India (RBI). On the other hand, NBFCs’ interest rates aren’t regulated by the RBI. They lend based on the Prime Lending Rate (PLR). Hence, they can increase or decrease interest rates basis their discretion.

MSMEs looking for lower interest rates or even higher interest rates (in case they don’t meet a bank’s eligibility criteria) can benefit from availing loans from NBFCs. Based on factors like turnover, credit score, etc., NBFCs offer competitive interest rates.

2. Quick processing

Banks rely heavily on paperwork and have stringent rules regarding the same. Hence, their procedures can be very time-consuming. On the other hand, NBFCs require minimum documentation and are known for their quick loan disbursements. The nature of a loan is such that a business needs it on an immediate basis. NBFCs capture this demand, and process loans swiftly.

3. Less stringent eligibility criteria

In most cases, banks don’t sanction a loan to fulfil the entire amount – a certain part has to be borne by the borrower ( NBFC?? THERE IS NO CONNECT HERE)

A bank may offer its best interest rate to someone who has a credit score of 750. Banks pay a lot of importance to credit scores and might even reject a loan application if the person does not meet the criteria. Those with low credit scores have better chances of getting a loan from NBFCs. As you see, eligibility criteria to avail loans from NBFCs are more flexible.

Capital is a vital part of every business. Whether it’s big or small, without sufficient funds a business cannot tap into opportunities, take risks, or plan for expansion.

If you’re looking for a business loan, keep in mind factors like the type of loan, the rate of interest, your credit score, disbursal timelines, etc. You can choose to borrow funds for your growing business from TATA Capital. Its loan schemes are easy to apply for, come with flexible options at affordable costs, have convenient repayment options, and help sustain and grow your business.

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