Decoding Financial Inclusion of MSMEs with Bindu Ananth

MSMEs are expected to account for 50% of India's national GDP and 60% of exports by 2025, but currently only 16% of the assessed dead demand is formally financed.

The majority of MSMEs in India are micro enterprises or single person enterprises, and most are not entrepreneurs by choice.

Understanding the nuances of the MSME landscape and financing needs is crucial for finding solutions.

Not all small enterprises are driven by growth, and policy often incentivizes them to stay small.

There is a large number of microenterprises that are a byproduct of households exiting agriculture, posing a challenge for policymakers.

Financing must meet an enterprise that thinks about growth, or else it's just pushing money.

Many entrepreneurs choose to stay small and not take on too much risk, even if it means limiting their growth potential.

The percentage of micro-enterprises with the potential and desire to grow is likely less than 5%.

It's important for policymakers and financial service providers to understand the needs and aspirations of their customers in order to design effective products and services. Informality may not necessarily be a negative aspect of entrepreneurship.

The Indian sector is largely informal and small, which requires designing systems that work for them.

Creating a taxonomy to talk about MSMEs would be helpful in channeling resources and structuring policy differently.

Access to finance is crucial for MSMEs, but it's not just about access to credit. Cash flow is also important for enterprise growth.

Debt needs a certain level of stability, which is often missed in conversations about pushing lenders to take more risk.

Poor households face a problem with lack of own capital, but some use gold as collateral for early stage capital.

The informal lending ecosystem will continue to play an enduring role in funding the zero to one stage of enterprises, and it's a tough problem to get formal risk capital at that earlier stage.

The question of who carries the downside risk in entrepreneurship is a significant concern, as philanthropy cannot carry the risk and small businesses may not be able to absorb it.

Systematic risks, such as natural disasters or global supply chain disruptions, should be treated differently and could potentially be underwritten or insured through targeted catastrophic insurance for MSMEs.

Governments should also be part of the conversation and focus on protecting.

The potential for digital finance to combine insurance and credit could absorb risk away from individuals.

The distinction between what banks and non-bank financial companies (NBFCs) can and should do is important in financing conversations, with NBFCs being fully funded by sophisticated investors rather than naive depositors.

There is an opportunity to increase the number of non-deposit taking NBFCs with explicit goals around inclusion and MSMEs.

Non-bank lenders are needed to develop more sophisticated and intuitive underwriting for small businesses that may not have traditional financial statements or digital footprints.

There is a need to prioritize growing the pool of non-bank lenders, particularly in the NBFC space, to support MSMEs.

The biggest need today is in the 1 to 5 range of nascent and risk capital businesses, where there is still a financing gap.

Regulators need to get more comfortable with the concept of investing in small businesses.

De-risking the supply chain could be a promising way to provide support for small businesses.

When designing products and services for small businesses, it's important to consider local context and customer needs.

Microfinance can have a significant impact on existing businesses, but lenders need to develop credit and pricing models that can identify potential borrowers' ability to repay and grow.

Legislation exists to ensure timely payments, but enforcement and automation are needed.

The cost of lending to small businesses is high due to paperwork and process times, which makes it more profitable for lenders to make larger loans.

Digitization is leading to more process innovation and efficiency, which could benefit customers.

Data science and customization are becoming increasingly important in lending.

The future of product design is at the intersections of different industries.

Startups can benefit from account aggregators, which provide customer data that would have otherwise been proprietary.

Efforts are needed to advance the growth of digital platforms while also enabling digitization and continuing the role of NBFCs in working with subsistence enterprises.

The transition to digital payments in India will not be a one-size-fits-all approach.

The Gems platform provides transparency around government requirements and criteria, which can encourage MSMEs and SME development.

Encouraging procurement through MSMEs in specific sectors can provide a push for the sector without adding to the government's expenditure.

Philanthropy can play a role in supporting MSME learning.

Developmental financial institutions and default guarantees have become important tools in making markets clear.

Secondhand markets can play a significant role in lending to entrepreneurs, especially for equipment purchases.

Skilling and risk pooling are areas where philanthropy capital can be used to solve problems that the market is not addressing.

Philanthropy can play a role in encouraging women to access credit and take more loans, which can have a positive impact on the household and family.

Women entrepreneurs face multiple hurdles and may be disproportionately featured in the reluctant entrepreneur category, so it's important to identify and solve for those barriers.