Revisiting Financing for Micro-enterprises
Micro-enterprises
(MEs)
play a vital role in India’s economic empowerment as more than 10.76 crore
jobs are created by 636 lakh MEs.1 They are engines that boost job creation
and fuel sustainable economic development. Despite their crucial role,
growth in the micro sector is limited owing to the constraint of limited
access to information and finance. According to the sixth Micro, Small and
Medium Enterprises (MSME) census, barely 2.3 per cent of MSME units in India
have access to finance from financial institutions, including non-banking
finance companies (NBFCs) and microfinance institutions (MFIs). In
comparison, 78.2 per cent of MSME entrepreneurs had to fund their
enterprises, which displays the risk a micro-entrepreneur carries in the
absence of proper financial accessibility. The ability of the financing
system to cater to the growing needs of the micro-enterprises credit remains
limited. Based on multiple pieces of literature from ground and Development
Alternatives’ experience with rural MEs, some of the reasons that hamper
access to bank-based financing for MEs are:
-
Access to reliable information and support services: The financial landscape
in India is changing rapidly with the acceleration of digital finance. Yet,
access to reliable information remains limited, affecting the accessibility
of credit for MEs. The lack of a single-window facility for MEs is often a
deterrent, as their requirement for credit is timely access, which leads
them away from the formal source of credit.
-
Low flexibility of formal sources of credit: India’s MEs have diverse needs
and are distributed into multiple sectors. Catering to such diversity
requires a high degree of flexibility and customisation from credit
institutions. But most schemes/products are one-size-fits-all types, and the
loan products have low amortisation, resulting in limited options for
micro-entrepreneurs to access formal credit facilities.
-
Prejudice of financial institutions against MEs: Small MEs, especially those
based in the rural side, are often out of the ambit of credit assessment,
such as the credit score provided by Credit Information Bureau (India)
Limited (CIBIL) or any other relevant parameter owing to their informal
operation processes as well as limited record-keeping capacity. Rural
bankers are especially apprehensive of non-performing assets. But the
available data comparing micro-enterprise and large enterprise access to
credit suggest otherwise. According to the Economic Survey 2017-18, out of
the total outstanding credit disbursed by banks of INR 26,041 billion as of
November 2017 82.6 per cent was lent to large enterprises and 17.4 per cent
to MSMEs. Whereas, the non-performing assets of large enterprises are
approximately 1.5 times more than those of micro-enterprises.2
Considering the above shortcomings of the
banking system, microfinance institutions (MFIs) have attempted to fill in
the gap by providing easy access to loans. MFIs have contributed a
significant portion of formal loan portfolios, which stand at INR 1,01,663
crore, accounting for 35 per cent of the total industry portfolio of
financial institutions (Bharat Micro-Finance Report, 2020). But, the high
rate of interest and the joint liability group-based loan disbursal process
of MFIs often make it difficult for individual MEs to access finance. The
recent Master Direction – Reserve Bank of India (Regulatory Framework for
Microfinance Loans) Directions, 2022 has further empowered the MFIs by
removing the cap on interest rates.3 This will not only increase
the burden on micro-entrepreneurs but also remove the bargaining power of
the loanees. Additionally, determining the loan amount on the basis of
family income may leave many new aspiring entrepreneurs out of the ambit of
credit, especially the youth.
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Development Alternatives in partnership with
Rang De has enabled access to loans worth INR 2 crore to 583 entrepreneurs
through Rang De's peer-to-peer social investing platform.
Financial accessibility, especially for MEs, requires systemic and
innovative solutions that not only focus on access to credit but also ensure
steady repayment ability of the loanees. In such aspects, the growing
numbers of blended financial products can play a vital role. Blended
financial products, including social investment, government-funded
developmental schemes, and debt from banks and NBFCs, can help further
penetrate financial inclusion as well as mitigate associated risks.
For a section of the Indian population that are out of the credit ambit or
‘digitally absent’, solutions such as account aggregation are being
innovated by OCEN (Open Credit Enablement Network). It uses embedded finance
technology, and can also enhance the tools for credit assessment.
References
1MSME.
2022. Annual Report Ministry of MSME India, 2021- 22. Last accessed on
20 May 2022 at
https://msme.gov.in/annual-report-2021-22 2TransUnion
CIBIL Limited. 2020. MSME Pulse. Last accessed on 20 May, 2022 at
https://www.transunioncibil.com/resources/tucibil/doc/insights/reports/report-msme-pulse-october-2020.pdf 3Reserve
Bank of India. n.d. Last accessed on 20 May, 2022 at
https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12256&Mode=0#:~:text=
The%20minimum%20requirement%20of%20microfinance,cent%20of%20its%20total%20assets
Ankit Mudgal
amudgal@devalt.org
Debasis Ray
dray@devalt.org
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