Written by Utpal Isar
Credit and Finance for MSME: There are more than 3.5 crore micro-enterprises in rural India. These include farm entrepreneurs, small-scale enterprises such as shopkeepers selling groceries and consumer goods, service providers such as vehicle repair services, electronics and electrical goods and agricultural equipment, small manufacturers such as RO plants, small agricultural equipment, etc. Micro-enterprises play an important role in the overall economic development of a country in terms of growth, improvement of livelihood, job creation and benefits. In addition, data and smart devices have reached the corners and corners of rural India resulting in a significant increase in digital experiences and openness to solutions compared to where we were less than a decade ago.
While entrepreneurs’ landscapes are becoming increasingly aware of their significance and potential in urban and metro cities, rural micro-enterprises are still unable to integrate seamlessly with finance, distribution and mechanization services, all the complex conditions to help them jump into this fleeting sector. The next orbit to achieve competition and production on the scale.
Despite the ongoing policy focus, the availability of funds and lack of technical knowledge have been the biggest impediments to the growth of this sector. Overall, our country’s traditional banking system facilitates credit access, which is still small compared to existing requirements for ancillary services. Against this background, micro-enterprises find it challenging to access adequate credit and leverage in technology for ease of doing business, both of which contribute to the unprecedented growth of the sector.
Current Status: Possibility of loan facility and demand for loan
By 2020, our country had more than 749 million Internet users across the country. However, a large portion of the 1.3 billion people are still unable to access basic banking services. In addition, Global Findex data shows how 5 percent of Indians have access to a financial institution’s account from their phone or the Internet, and only 2 percent of the population has a mobile money account. It basically tells us that the infrastructure for technology-based rural financing exists, but the threshold needs to be crossed for the convenience of technology adoption. Rural-centric fintech startups can effectively facilitate this transition.
In terms of demand for funds, the total external debt demand is estimated at Rs 37 trillion where the total supply of funds from formal sources is estimated at Rs 14.5 trillion. .
Barriers to growth are barriers to financial inclusion
In the credit market, unfavorable choices and moral hazards increase for small-scale enterprises that have no debt history or collateral for the loan. Micro-enterprises generally suffer from higher loan rejection rates than others due to their high risk profile. It is safe to say that this financing gap, which affects micro-enterprises, is essentially an increasing capital gap.
Assessing the creditworthiness of micro-enterprises due to data inequality is another matter of pain. Most rural enterprises struggle with the lack of standardized banking data, cash flow details, etc. required for credit assessment.
Regulatory errors often cause perennial problems for micro-enterprises, as they impede financial access even though the government has implemented measures to provide credit access to micro-enterprises. In the case of lender coverage, loan depth is very low in large parts of rural areas. After all, the traditional credit system results in a higher turnaround time, which hinders the micro-enterprise business process.
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How technology navigates challenges
To meet day-to-day operations and acquire productive assets, micro-enterprises require working capital and term loans. For example, hire an onion farmer from Maharashtra for manual seed sowing and planting. Now technology-driven access to farm mechanization, financing and distribution could potentially reduce farming costs by two to three times, improve productivity and reduce reliance on manual labor.
In a family-centered, innovative approach to lending, the entire rural household is considered to be the borrower rather than the individual. In the case of onion growers, the income of the whole family can be considered as working capital, which will positively affect the assessment of the borrower’s ability to repay the loan.
Fintech startups operating in rural areas can use surrogates such as asset size and quality (house / land / farm equipment / livestock numbers), bank statements, GST data and standard scorecards to assess the indebtedness of micro-enterprises. Consistency and simplification between different loan application formats and evaluation processes is required to ensure quick decision making and reduction of turnaround time, consistent with learning from supply chain financing and cash flow escrowing.
Going forward, in the absence of collateral, borrower underwriting often involves a high-tech, high-touch model, a significant innovation in how small business loans are valued, underwritten and managed. Rural lending startups can effectively complete loan applications in less than 7 days from sourcing to delivery, emphasizing the advantages of the technology platform to analyze data points from various sources such as GST data, IT returns, bank statements, etc. using algorithms.
Electronic KYC could redefine lending to micro-enterprises with paperless (digital) applications, fast loan underwriting and greater emphasis on customer service. AI-driven solutions and voice-based BOT solutions to transform manual processes into intelligent and interactive chat will not only enhance the ground team’s efficiency but also offer customers an enhanced digital experience. The lack of rural enterprise data can be addressed by physically collecting and verifying and digitizing all non-standard details before applying the credit algorithm. This increases the TAT but enables timely credit access.
Combining the above financial literacy campaigns and focusing on financial education, especially for women and children, and providing technical knowledge on how to improve agricultural yields through locally run apps and call centers will help transform these rural initiatives into a major development. Can Segment which will help the national economy to grow due to the sheer size of this segment.
Bottom line, a customized technology-led solution takes time to unlock the growth potential of micro-enterprises. One that builds trust in the system by acting as a last-mile partner, includes touchpoints for rural customers while maintaining a physical and digital presence, and purposefully addresses the growth-centric sophistication of micro-enterprises in rural India.
Utpal Isa is the co-founder of Sarvagram. The published opinion is the author’s own.