NBFCs Are Quietly Powering India's MSME Revolution Between FY21 and FY24, NBFCs recorded a 32 per cent compound annual growth rate (CAGR) in MSME lending, albeit on a smaller base, compared to 20.9 per cent for private banks and 10.4 per cent for public sector banks.
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India's Micro, Small, and Medium Enterprises (MSMEs) have long been recognized as the silent engines of economic growth. But in recent years, it's not the traditional banks that have fueled their momentum, it's the non-banking financial companies (NBFCs). These institutions, often overlooked in broader economic narratives, are transforming the credit landscape by going where banks won't, understanding what banks can't, and funding what banks don't.
"NBFCs are playing a crucial role in filling the credit gap for India's MSMEs by providing more accessible, convenient, and speedier credit options than traditional financial institutions," said Santanu Agarwal, deputy managing director, Paisalo Digital Limited. The agility and ground-level presence of NBFCs allow them to reach deeply into semi-urban and rural economies, meeting entrepreneurs on their own terms. This isn't just about filling out paperwork and crunching numbers; it's about understanding people, their potential, and the context in which they operate.
The rigidity of traditional banking often leaves many MSMEs, particularly those in informal or first-time entrepreneurial ventures, shut out. Banks typically demand collateral, extensive credit histories, and rigid documentation. In contrast, NBFCs are flipping that script by leveraging technology and behavioral data to evaluate creditworthiness. "By using alternative data and behavioral factors, they can provide credit to MSMEs that do not have robust financial history but high entrepreneurial potential," Agarwal emphasized.
For many entrepreneurs in rural India, the first financial partner they ever interact with is an NBFC. Dhiraj Jha, CEO of Satin Finserv Ltd., explained how deep local insights make a difference. "We benefit significantly from SCNL's on-ground insights into the economic realities and behavioral patterns of rural India. This enables a more personalized, flexible, and accessible lending approach tailored to the unique challenges faced by MSMEs," he said.
The relationship-centric model of NBFCs is more than a customer service strategy; they are not just lenders, they are partners embedded in the same communities they serve. "NBFCs have a higher risk appetite as compared to the Banks both public and private," said Vivek Iyer, partner at Grant Thornton Bharat. "This is driven by deeper customer understanding given the higher level of focus on a certain geography and customer category." That insight allows NBFCs to lend more effectively, even in cases that banks might deem too risky.
These institutions are also scaling their operations in ways that banks rarely do. "NBFCs innovate in credit delivery by designing products and risk models that reflect real-world challenges, including informal incomes and seasonal business cycles. With a customer-first approach combining financial literacy, responsible lending, and post-loan support, NBFCs foster credit discipline and improve repayment outcomes," said Mayur Modi, co-founder, co-CEO & COO of Moneyboxx Finance Limited.
The impact is tangible and far-reaching. From livestock rearing to retail, from farming to small manufacturing, NBFC-backed credit is driving real economic activity. "NBFCs are powerful enablers of MSME growth, providing timely and affordable credit that helps entrepreneurs expand, invest in technology, and boost productivity," Modi added.
Geeta Goswami, CEO, Usha Financial Services Limited, underscored how these institutions are reshaping the very foundation of small business financing. "We are not just providing capital—we are empowering MSMEs to scale, innovate, and drive inclusive economic growth." This goes beyond disbursals and repayment cycles. It's about providing financial education, digital onboarding, and services that turn informal businesses into stable, growth-ready enterprises.
With their grassroots networks and high-touch engagement, NBFCs are building what traditional banking has often failed to, that is, trust. They are fostering borrower confidence, ensuring credit discipline, and embedding financial literacy into their lending models. "NBFCs innovate in credit delivery by designing products and risk models that reflect real-world challenges," Modi said. This has ripple effects, not just in economic terms, but in creating a culture where small entrepreneurs feel seen, supported, and believed in.
As per a report by CareEdge Ratings, MSME lending has witnessed robust growth in recent years, with NBFCs emerging as the front-runners, outpacing the growth rates of both private and public sector banks. Between FY21 and FY24, NBFCs recorded a 32 per cent compound annual growth rate (CAGR) in MSME lending, albeit on a smaller base, compared to 20.9 per cent for private banks and 10.4 per cent for public sector banks. The share of MSME credit in NBFCs' overall loan portfolio rose from 5.9 per cent in FY21 to 9.1 per cent in H1 FY25, an increase of over 50 per cent.
