Industry perspectives: The year that was for NBFC and BFSI Tech

2023 was a year of curious events for the BFSI and tech sector, with asset quality and balance sheets demonstrating robust growth, but 2024 already promises a slew of changes, as heightened competition and moderate credit growth stymie strategists across these bulwark sectors.

Team Marksmen spoke with a cross-section of leaders, to understand their take on the year gone by, and their outlook for the future.

“MSME lending in 2024 to be dominated by innovative financing models”, states Hardika Shah, Founder & CEO, Kinara Capital.

“2023 has been a momentous year. The buoyancy in the manufacturing sector, strong domestic demand for goods and services, and the continued resilience of the economy have enabled India to maintain its status as a nation to watch out for. In fact, the resilient growth has had a ripple effect on all industries, including last-mile lending. In 2023, the sector saw an upswing in appetite for credit, especially from the MSME sector. According to MSME Pulse Report, the demand for commercial loans witnessed a 33% Y-o-Y growth during the January to March period. As the year progressed, the demand momentum persisted. At Kinara Capital, too, we saw a 150% Y-o-Y growth in inquiries during the festive period, indicating strong demand for credit from small entrepreneurs.

Looking ahead, we expect the momentum to continue. Beyond the rise in demand for credit, we anticipate innovative models of financing to take center stage and become key levers in driving the financial inclusion of MSMEs.

Here are some of the major trends that are poised to impact MSME lending in 2024:

• EMBEDDED FINANCE: Rising demand for credit, particularly faster access to it, coupled with technological advancement, will pave the way for greater adoption of embedded finance. Kinara’s MSME Sentiment Survey revealed that over 55% of MSMEs want an instant line of credit to accelerate everyday business decisions. Similarly, the tech transformation that has been underway is expected to see an upswing, leading to the simplification of assessment, as well as a boost in the prospects of embedded finance. It will expand partnerships across e-commerce platforms, NBFCs, banks, and other players, and enable faster access to credit at the point of need as well as open up new opportunities to serve niche credit needs.
• IMPROVED MSME FORMALIZATION: Formalization has already been on the rise, with the Udyam portal witnessing a spike in registrations. Between July 2020 and December 2023, 3.16 crore MSMEs were registered, with a total of around 1.17 crores of them being women-owned MSMEs, including informal micro-enterprises registered on the Udyam Assist Platform. The GST system has also been evolving, and going forward, it is expected that GST filings will be simplified further to increase formalization among MSMEs. The government has been focused on bolstering ease of doing business for the MSME sector, and this initiative is also likely to keep going strong, with further policy support and schemes to strengthen the sector, which is often referred to as the backbone of the economy.
• RISE IN TECH-ENABLED ALTERNATIVE CREDIT ASSESSMENT MODELS: India’s digital stack has made it possible to authenticate individuals and businesses and technologies like AI/ML have revolutionized MSME creditworthiness assessment. Going beyond the credit score, technology has made it easier to analyze varied data sources such as UPI transactions, bank statements, business invoices, etc., which makes it possible to estimate the cash flow of a business and reach a credit decision with minimum documentation. With the proliferation of other technologies and platforms, from CKYC, and Account Aggregator to ONDC, etc. There will be more opportunities to serve niche credit-starved segments, especially MSMEs. 2024 is expected to see a shift from a traditional collateral-heavy model to a transaction-based assessment, bringing more MSMEs into the fold of formal credit.”

Arun Nayyar, MD & CEO, NeoGrowth, believes that coming year will see strong MSME credit demand

“The year 2023 has been an economically enabling year for the MSME ecosystem. Right at the beginning of the year, our MSME Business Confidence Study 2023 revealed that 3 out of 4 MSMEs were confident of India’s economy and 96% MSMEs expected their profits to increase during the year. 2023 saw Digital India at its peak; UPI transactions marked the INR 17.4 trillion milestone in November 2023. Formalisation of the economy is another driver of economic growth. GST collections touched INR 1.68 trillion in November 2023. This year saw a healthy MSME credit demand, with FMCG and retail, Consumer Durables and Apparel being the key segments.

In the coming year, we expect a similar trend. The growth of the NBFC ecosystem will be driven by strong risk and governance mechanisms. A deep understanding of the MSME segment combined with the power of AI/ ML and data-based lending models will continue to facilitate MSME lending. With the integration of technology, NBFCs with responsible lending practices, creating a positive impact, will lead the way. With increasing digital sophistication in the financial services sector, compliance, governance, and risk-reward models will sit at the center of the MSME lending industry.”

“We remain optimistic about the sector’s long-term growth potential”, says Gautam Jain, Chief Business Officer, Vivriti Capital

“The NBFC sector has experienced some hurdles due to rising interest rates on account of the geo-political climate and recently with RBI regulations on risk weights. Despite these challenges, we remain optimistic about the sector’s long-term growth potential, driven by the persistent demand for credit from mid-market corporate businesses.

While the ongoing funding winter may have hindered capital-raising efforts, we believe that capital is available for proven business models generating positive cash flows and anticipate that credit demand in the sector will continue to grow as inflation subsides (already hovering around the tolerance band) and interest rates stabilize in the next 6 to 9-month cycle. The increased risk weight for NBFC loans under the new RBI regulations will raise borrowing costs for NBFCs, however, the impact could be short-term in nature as NBFCs will be able to adjust their lending rates accordingly. Overall, we are confident in the NBFC sector’s ability to overcome these temporary challenges and achieve long-term growth.”

V. Balasubramanian, CEO, FSS Cash Tech, believes that “cloud technology is the way forward in digital payments“

“RBI’s proposal to establish a cloud facility for the Indian financial sector is a move in the right direction. We’ve seen numerous instances of data breaches and all of us understand the importance of keeping customer data secure. Cloud technology is known to enhance privacy through its homogeneous architecture and centralised security, and guard against DDoS attacks. 

FSS has also recognized that cloud technology is the way forward in digital payments, which is why we have built FSS Blaze. In a world that is becoming increasingly digital, a cloud facility will be a win-win for everyone involved – regulators, companies and customers. RBI’s move will accelerate the cloud movement in India, pushing for more Made in India Initiatives, we should have Bharat Cloud even for payments in India.”