In India’s fast-growing small business landscape, Non Banking Financial Companies (NBFCs) have become the backbone of MSME financing. When banks hesitate, NBFCs step in. When entrepreneurs need urgent working capital, NBFCs are the first to respond.
But behind the glitter of easy loans and quick approvals lies a hard truth:
NBFC loans can either help a business grow—or silently push it into a debt spiral.
This article uncovers both sides of the story—the good, the bad, and the urgent need for reform.
you may also like to read: Comparing Indian NBFC Finance for MSMEs with the U.S.: What India Can Learn
Banks remain cautious and paperwork-heavy. NBFCs fill this gap by offering funds even to first-time borrowers, traders, and micro-units.
Loan approvals in 24–72 hours, minimal documentation, and doorstep service—this is unmatched by traditional banks.
NBFCs build products around Indian business realities.
NBFCs operate where banks often don’t—small towns, rural markets, and neighbourhood business clusters.*
BusinessZindagi is built on real experiences—and this topic hits close to home.
A local kirana owner took a small NBFC loan to expand his stock.
Sales slowed → EMI missed → penalties increased → harassment calls started.
Within months, the loan meant to help him grow became the reason he shut his shop permanently.
A close relative borrowed from a well-known NBFC.
High interest rates + short weekly repayment cycles = stress.
Soon, he was receiving:
• threatening calls
• repeated visits
• legal notices
These are not isolated cases—they reflect what thousands of small business owners silently go through every month.
NBFC convenience comes with a hidden cost, and many MSMEs don’t realise it until it’s too late.
NBFCs borrow at higher rates than banks, so MSMEs end up paying the price.
Weekly or bi-weekly EMIs don’t match real business cash flows.
Despite RBI rules, harassment and intimidation still exist on the ground.
One missed EMI → penalty → increased EMI → more penalties → loan rollover → bigger debt.
Many MSMEs don’t fully understand effective interest cost, foreclosure terms, or hidden charges.
Not everything is negative. If used wisely, NBFC loans can genuinely help small businesses grow.
NBFCs support urgent needs like bulk buying, supplier payment, or seizing a business opportunity.
Even if your credit score is weak or you don’t have property, NBFCs may still lend.
They understand the rhythm of Indian markets better than many banks.
Women entrepreneurs, micro traders, and rural businesses benefit the most.
A reasonable upper limit would prevent exploitation without hurting NBFC viability.
RBI must directly monitor field recovery operations to prevent harassment.
Monthly or quarterly cycles must be the default for MSMEs—not weekly collections.
Loan protection insurance can reduce both borrower and lender risk.
Before sanctioning a loan, NBFCs should be required to provide a one-page risk disclosure in simple language.
NBFCs are a lifeline.
But unregulated freedom has turned many into stress creators instead of growth partners.
If India wants its 6.3 crore MSMEs to grow sustainably, NBFCs must evolve into responsible lenders who balance:
speed + fairness + transparency + empathy
Real-life stories—like those from my own locality—show how urgent the need for reform truly is.
NBFC loans will continue to grow because MSMEs need fast, flexible credit.
But without reforms in interest rates, collections, transparency, and borrower protection, the debt trap problem will get worse.
India needs a lending ecosystem where:
Responsible lending is not just regulation—it’s the future.
Tabrez
Founder of BusinessZindagi.com
A passionate business writer helping Indian entrepreneurs understand finance, insurance, MSME policy, and digital transformation.
This blog post is for information & educational purposes only.
It should not be considered financial, legal, or investment advice. Readers should verify facts independently and consult professionals before making financial decisions.
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