Nature of MSME
The
Micro, Small and Medium Enterprises (MSME) are estimated to contribute 8% of India’s
GDP, 45% of the manufactured output and 40% of its exports. India is estimated
to have more than 26 million MSMEs. While a few of the MSMEs operate as
registered entities (with at-least minimal registration required as per the
taxation laws) a large majority of them operate as very small unregistered
proprietary concerns owned by micro entrepreneurs.
The
financial needs of these enterprises have not been adequately addressed by formal
financial institutions. An important reason that makes lenders reluctant is the
inability of the entrepreneurs to provide collateral. While MFIs provide
collateral free loans to the poor, these loans are inadequate to fulfill the
needs of micro enterprises. Moreover guarantee mechanisms such as joint
liability groups seldom work effectively in the case of microenterprise loans.
Plain Collateral
Free Debt May Not be the Solution
There
have been pilots which have involved provision of collateral free credit to
informal-semiformal enterprises. In one such pilot in 2009, which involved
Satin Credit Care Network (an MFI operating in Delhi), SIDBI and GIZ (technical
assistance arm of the German Federal Government), loans in the range of Rs
50,000 and Rs 500,000 were provided to 48 entrepreneurs in the Delhi cloth
cluster. A report prepared by M2i, “Financial Inclusion of Microenterprises in
the Informal Sector – Missing Middle” documents the experience of this pilot.
One of the important findings of the pilot was that while over a period of time
the loans were being repaid, at any given point in time some of the loans
appeared irregular. Irregular cash-flows of the borrowers made it difficult for
such enterprises to make regular repayments of loans.
Solution Must
Look For Risk Capital
In
order to address this lack of finance for microenterprises it becomes important
to look beyond plain credit. An effective financial solution will be the one
that takes into account the irregular nature of cashflows of microenterprises.
It is here that a mechanism which provides equity like capital to these
enterprises can fundamentally shift the way these enterprises are perceived by
the financial sector. Many microenterprises have highly profitable and scalable
business models. However, they are unable to scale-up their businesses in the
absence of equity capital. There are other constraints too, which provision of
equity can address:
1.
Inability
to obtain appropriate registrations under labour, environment, tax and
corporate laws
2.
Lack
of management capacity which leads to bad accounting and control
Equity
investments in such enterprises can be a highly rewarding proposition with
benefits to all stake holders. The entrepreneur can potentially get rich and
generate numerous jobs. The government stands to gain from the formalization of
these enterprises. Cynics will argue that private equity investments are a
costly affair and small value transactions in informal enterprises in a retail
model is not feasible. Professor Mohammed Yunus helped disprove similar notions
regarding banking services to the poor two decades ago. Perhaps the time has
come to use innovative financing mechanisms to help the informal sector join
the mainstream economy.
