Over the past few years in the Indian business industry, the MSMEs are playing a crucial role in the growth and improvement of the economy. However, the scarcity of resources and finance brings an enormous impact on the overall evolution of the new businesses. The size of the businesses being subtle, they have a limited capacity to bear risks and breakdowns. Majority of the small business firms operate with an inadequate sum of capital and handiness of funds. Find out how non-banking financial institutions play a significant role over banking institutions in offering the new and developing micro, small and medium enterprises.
Capital determines the overall growth and development of a company
Instead of borrowing from externally, the MSMEs are entirely dependent on the revenue they earn through their operations. At times, companies depend entirely on the owner’s investment in capital which obstructs the long-term growth of the business. The insufficiency of funds and credit implies a lack of product modifications and low technology level further limiting the progress of the firm. The MSMEs can invest in a broader network, scientific and mechanical know-how, research and development, branding only when they have enough funds to perform these functions. Additionally, a delay in cash transactions for the services can put the company in an immense pressure affecting their working capitals and operations. Thus, the entire growth and development of a business is based on the capital formation of the firm.
Small business groups favor NBFCs
The MSMEs in large numbers prefer taking loan and credit from non-banking financial institutions for a reason being less of paperwork and quick release of funds compared to formal banks. Consequently, NBFCs have fascinated new business ventures because of their trouble-free, timeliness and favorable processes. Banks do not have the complete credit information of the small and medium business units as it does not get cost effective for banking collecting such information in large. Banks usually add the cost information unevenly to the lending rates that makes taking loans from banks quite expensive. Time issues, processing deferrals, uneven information, resolute credit policies and collateral requirement make the small and medium business ventures prefer low-interest business loans from private and other non-banking financial sectors.
Commercial Banks waver to offer loans to MSMEs
The new business units usually depend on the self-financing mode of operations. This results in insufficiency of capital. The organized banking systems consider small businesses to be high-risk borrowers. This is because the banks assume that these companies highly fluctuate in their earnings and hold a high mortality rate. Thus, the banks hesitate in offering loans to this newly formed micro, small as well as medium ventures letting the private and non-banking financial agencies play a significant role and this is the one of the major reason why SMEs trust & approach NBFC’s more over the Banks.