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Decoding Impact

Decoding Financial Inclusion of MSMEs with Bindu Ananth

Fri Feb 10 2023
  • 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.