How NBFCs Empowering MSMEs With Stock Enhancement Financing

MSMEs are the backbone of India’s economy, contributing over 30 per cent to the GDP and employing more than 120 million people. Despite their importance, the sector faces significant challenges, particularly in accessing timely and adequate financing. This is especially true for micro and small enterprises, which often operate on tight margins and rely heavily on working capital to sustain operations.

One innovative solution to this issue is stock enhancement financing, a credit facility that allows businesses to maintain or expand their inventory. This financing model is crucial for MSMEs to meet growing demand, optimize costs through bulk purchasing, and ensure uninterrupted operations. However, traditional banks have been hesitant to adopt such solutions, focusing instead on low-risk, high-return investments that require less operational effort. Serving MSMEs, especially micro-enterprises, often involves labour-intensive processes like detailed credit assessments and extensive transaction management. This approach does not align with the banks’ priorities, leaving millions of enterprises underserved.

Stock enhancement financing, championed by NBFCs, has emerged as a lifeline for these businesses. By addressing the unique needs of MSMEs, NBFCs have been able to fill the gap left by traditional lenders. Technology has played a pivotal role in this process, streamlining applications, credit scoring, and documentation, which has reduced turnaround times and improved accessibility. However, the nuances of financing MSMEs often go beyond what technology can achieve. Many micro and small enterprises require a personalized approach involving physical assessments and one-on-one consultations to understand their operations and growth potential. This hybrid model, combining technological efficiency with human insight, has proven effective in creating tailored financial solutions. The potential impact of expanding stock enhancement financing is immense. India’s MSME sector is poised for exponential growth, with projections indicating that the number of micro and small enterprises will double from 70 million to over 150 million by 2035, driven by initiatives like Swavalambi Bharat. This growth underscores the need for innovative and accessible credit solutions to unlock the full potential of these businesses. The economic implications are significant; as MSMEs gain better access to funding, they can expand their operations, generate employment, and contribute more substantially to India’s GDP.

Talking to Bizz Buzz, Sumit Sharma, Founder-Radian Finserv said, ““The growth of India’s MSME sector hinges on access to timely and tailored financing solutions. Stock enhancement financing is a game-changer, especially for micro and small enterprises, allowing them to scale operations, manage inventory, and seize market opportunities. While traditional banks often overlook this space due to operational complexities, NBFCs are stepping in to bridge the gap with a blend of technology and personalized assessments. Empowering MSMEs is not just about addressing a credit gap; it’s about fuelling economic growth and fostering financial inclusion for millions of entrepreneurs.”

Despite these opportunities, challenges persist. For stock enhancement financing to reach its full potential, increased participation from banks, improved policy frameworks, and more targeted financial products are essential. Collaborative models, such as co-lending arrangements between banks and NBFCs, could help reduce risks and make MSME financing more viable for traditional institutions. Regulatory support, including flexible lending norms and credit guarantees, would further encourage financial institutions to invest in this sector

Surender Kumar, Chief Technology Officer at iMoney Pay said, “Traditional lenders and NBFCs can adopt new technology solutions to address operational challenges, reduce human intervention and bring in speed, accuracy and efficiency. Lenders, non-bank PPI companies and payment banks can work together to solve this problem.”

PPIs and payment banks cannot lend on their books, but they process billions of digital transactions for the MSME sector, generating and owning huge data. This data can be leveraged for benefits of lenders and borrowers both. By nature, stock enhancement financing needs to be fast, or you can say “Credit delayed is credit denied”. Unified Lending Interface (ULI) initiative by RBI will further this cause to bring in sustainably comprehensive change, he said.

Stock enhancement financing is more than a tool for individual business growth; it is a catalyst for broader economic development and financial inclusion. By empowering underserved enterprises, it enables a larger segment of society to participate in formal economic activities, fostering innovation and self-reliance. As India’s MSME ecosystem continues to evolve, a concerted effort to address its financing needs will not only strengthen individual businesses but also drive national progress.