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