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.

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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