Access to credit to Micro, Small and Medium Enterprises (MSMEs) and low income groups for income generating purposes

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Access to credit to Micro, Small and Medium Enterprises (MSMEs) and low income groups for income generating purposes
SectorMost major industry classification systems use sources of revenue as their basis for classifying companies into specific sectors, subsectors and industries. In order to group like companies based on their sustainability-related risks and opportunities, SASB created the Sustainable Industry Classification System® (SICS®) and the classification of sectors, subsectors and industries in the SDG Investor Platform is based on SICS.
Financials
Corporate and Retail Banking
Business Model Description

Fintech or Alternative Lending models that leverage technology to utilize alternative data such as GST (Goods and Services Tax) that allows an insight into business parameters such as inputs, value, place of business, amount of taxes levied to derive information about business book size, assess financial risk appetites and gauge capacity to service further debt obligations. Utility bills, bank account statements are some other data points that are used.

Fintech lenders offering invoice financing as a short-term working capital facility based on unpaid invoices of MSME clients/customers to help in solving liquidity related challenges in the short term.

Peer to Peer (P2P) lending model that is a digital marketplace connecting borrowers with lenders allowing quick access to low cost loans.

Cluster financing model approach to lending is intended to provide a full-service approach to cater to the diverse needs of MSME business units operating in a particular region and within a distinct, well defined business cluster such as leather making or food processing. Financial service providers have been using this approach to identify clusters and organize them by similar data points that allows for predictability around businesses’ capacity to service debt, risk profiles and product needs.

Traditional microfinance business models implemented by NBFC (Non Banking Fianncial Companies) MFIs (Microfinance Institutions), Small Finance Banks using Joint Liability Group (JLG) model, to provide collateral free loans to low income segments primarily from the micro and small enterprise categories. The JLG model is also primarily constituted by women members of the households that operate the enterprises seeking credit from financial institutions.

Expected Impact

Enhancing productivity and economic resilience of micro and small businesses through access to working capital and debt financing for their business needs.

Indicative ReturnDescribes the rate of growth an investment is expected to generate within the IOA. The indicative return is identified for the IOA by establishing its Internal Rate of Return (IRR), Return of Investment (ROI) or Gross Profit Margin (GPM).
> 25% (in IRR)
Investment TimeframeDescribes the time period in which the IOA will pay-back the invested resources. The estimate is based on asset expected lifetime as the IOA will start generating accumulated positive cash-flows.
Short Term (0–5 years)
Market SizeDescribes the value of potential addressable market of the IOA. The market size is identified for the IOA by establishing the value in USD, identifying the Compound Annual Growth Rate (CAGR) or providing a numeric unit critical to the IOA.
> USD 1 billion
Average Ticket Size (USD)Describes the USD amount for a typical investment required in the IOA.
In 2019, at USD 9.1 billion, PE/VC investments in the financial services sector in India was up by 20% compared to the previous year. (16.10)
Direct ImpactDescribes the primary SDG(s) the IOA addresses.
No Poverty (SDG 1) Decent Work and Economic Growth (SDG 8) Industry, Innovation and Infrastructure (SDG 9)
Indirect ImpactDescribes the secondary SDG(s) the IOA addresses.
Zero Hunger (SDG 2) Good health and well-being (SDG 3) Gender Equality (SDG 5) Reduced Inequalities (SDG 10) Partnerships For the Goals (SDG 17)
Country
Regions
  • India: Countrywide
SectorMost major industry classification systems use sources of revenue as their basis for classifying companies into specific sectors, subsectors and industries. In order to group like companies based on their sustainability-related risks and opportunities, SASB created the Sustainable Industry Classification System® (SICS®) and the classification of sectors, subsectors and industries in the SDG Investor Platform is based on SICS.
Financials
FN

Development need: Financial inclusion is positioned prominently as an enabler of developmental goals in the 2030 Sustainable Development Goals, where it is featured as a target in eight of the seventeen goals (5.1). Financial inclusion is a key focus area of The Aspirational Districts Programme of the Government Of India (GoI), where it is one of the dimensions used to rank the comparative performance of India's districts and is observed to have a direct bearing on the quality of life and economic productivity of citizens. (5.2) By 2017, 80% of Indians had at least a Basic Savings Basic Deposits Accounts (BSBDA) due to GoI push for universal access to formal banking services under the Pradhan Mantri Jan Dhan Yojna (PMJDY) that was launched in 2014. Of the total number of bank accounts opened, usage of banking services is limited with only 43% of the PMJDY accounts being actively used between 2017-2018. (5.5) Adoption of formal financial services remains low due to the largely cash-based economy where over 65 million Indians still use over-the-counter services to send or receive domestic remittances (5.6) and cash continues to be a dominant mode of transaction despite the demonetization drive in 2016.

Policy priority: The roll-out of Pradhan Mantri Jan Dhan Yojna (PMJDY), a GoI scheme to provide universal access to bank accounts in India, has played a pivotal role in creating a gateway to accessing formal financial services. By 2017, 80% of Indians had at least a Basic Savings Basic Deposits Accounts (BSBDA). Since the roll-out of the scheme, parallel efforts such as launch of a universal, biometric-based unique identification system- Aadhar, bolstering of payments infrastructure to enable digital transactions through Unified Payments Interface (UPI), roll out of insurance cover through Pradhan Mantri Suraksha Bima Yojana (PMSBY) and coverage of pension through Atal Pension Yojana (APY) have been made to offer a holistic package of services to improve socio-economic resilience of citizens.

Gender inequalities and marginalization issues: Despite the focus by GoI to further financial inclusion in the country, a recent study by a global rating agency- Standard & Poor, titled- "Financial Literacy Around The World", reports that only 24% of the adult population in India is financially literate based on the study respondents' understanding of risk diversification, numeracy (ability to calculate interest rates), Compound Interest and Inflation (5.3). The 2016 Financial Inclusion Insights survey found only 30% of the Indian population was digitally financially included, meaning individuals were able to access their accounts via any number of electronic platforms including debit and credit cards, electronic money transfers, or mobile phones (5.4)

Investment opportunities introduction: Access to finance and cost of credit have been a concern for the MSME sector with over 84% of the credit demand being met through informal sources. Of the 16% that comes from formal sources, 81% comes from Public Sector Banks, leading to significant opportunities for private sector participation for viably closing the credit gap in the sector (5.10)

Key bottlenecks introduction: Technology is evolving very quickly and consumer stickiness is a concern for many players. It takes a significant amount of time to establish such a relationship and it is only organizations like PayTM (250 million wallet customers) and FINO (pre COVID monthly transactions at USD 60 million a month) who have been able to establish such over a 5-10 year horizon (17.25)

SubsectorMost major industry classification systems use sources of revenue as their basis for classifying companies into specific sectors, subsectors and industries. In order to group like companies based on their sustainability-related risks and opportunities, SASB created the Sustainable Industry Classification System® (SICS®) and the classification of sectors, subsectors and industries in the SDG Investor Platform is based on SICS.
Corporate and Retail Banking
FN.2

Development need: Contribution of the Micro, Small, and Medium Enterprises (MSME) to India’s GDP is 29.7% as of 2019 (5.7) and the share of MSME related products in total export from India during 2018-19 is 48.10% (5.8). According to the National Sample Survey (NSS) 73rd round conducted during the period 2015- 16, the MSME sector has created over 110 million jobs across rural and the urban areas in the country thereby playing a crucial role not just in the economy in terms of employment generation but also reducing regional, social and economic imbalances. However, access to finance and cost of credit have been a concern for the sector (5.9) with over 84% of the credit demand being met through informal sources (5.10). The informal nature of MSMEs where many businesses in this segment are not formally registered, lack of documentation regarding cash flows, credit histories, and governance, leads to hesitation on behalf of formal financing institutions to optimally serve the sector with credit (5.11)

Policy priority: Besides the promotion of universal banking services, GoI has launched many flagship schemes to promote financial inclusion of MSME businesses including the provision of financial security to empower the poor and unbanked. These include Pradhan Mantri Mudra Yojana, Stand-Up India Scheme, and Direct Benefit Transfer (DBT) schemes to facilitate financial inclusion especially using digital platforms. (5.19)

Gender inequalities and marginalization issues: Gender focus for last mile lending models such as NBFC MFIs that primarily channel funds for household based enterprises through women also has a positive outcome by increasing the participation of women as channels of accessing formal credit.

Investment opportunities introduction: COVID-19 has lead to a massive credit crunch for small businesses and reverse migration from urban to rural areas requiring alternate means of income through entrepreneurial ventures such as small businesses. Lockdowns, loss of employment, and social distancing prompted a chaotic and painful process of mass return for internal migrants. The COVID containment measures have potentially contributed to the spread of the epidemic among migrants as they undertook the journey back home with limited recourse to financial services and particularly social protection measures (5.20). At an enterprise level, the MSME sector is burdened with canceled orders, loss of customers, and supply chain disruptions – causing a sharp fall in revenues. This cash flow shortage is exacerbated by constraints to accessing finance, potentially leading to solvency problems. The broad-based loss of cash flows has triggered a chain of non-payments throughout the economy, including to the financial sector (5.21). Uncertainty around future income due to the spread of the pandemic including unpredictability around its decline and lowering of purchasing power of customers further endangers the MSMEs to smoothly ride out the pandemic. According to a survey conducted by Microsave Consulting in June 2020, nearly 75% of MSMEs have reported a loss in income (5.22). Given the current crisis and its impact on capital markets and businesses across, banks and NBFCs will face clients who are potentially experiencing stressed financial conditions, including deterioration of their credit ratings and credit quality. There is also a high potential for current loans turning into Non-Performing Assets (NPAs) (5.23).

Key bottlenecks introduction: Traditional Microfinance model has scaled up successfully and investors opine that this trend will continue owing to the growth of the sector through a tightly regulated ecosystem with clear guidelines around licensing, product offering, interest rates and customer protection measures. MSMEs:

IndustriesMost major industry classification systems use sources of revenue as their basis for classifying companies into specific sectors, subsectors and industries. In order to group like companies based on their sustainability-related risks and opportunities, SASB created the Sustainable Industry Classification System® (SICS®) and the classification of sectors, subsectors and industries in the SDG Investor Platform is based on SICS.
Commercial Banks
FN-CB
Investment Opportunity Area

Access to credit to Micro, Small and Medium Enterprises (MSMEs) and low income groups for income generating purposes

Business Model

Fintech or Alternative Lending models that leverage technology to utilize alternative data such as GST (Goods and Services Tax) that allows an insight into business parameters such as inputs, value, place of business, amount of taxes levied to derive information about business book size, assess financial risk appetites and gauge capacity to service further debt obligations. Utility bills, bank account statements are some other data points that are used.

Fintech lenders offering invoice financing as a short-term working capital facility based on unpaid invoices of MSME clients/customers to help in solving liquidity related challenges in the short term.

Peer to Peer (P2P) lending model that is a digital marketplace connecting borrowers with lenders allowing quick access to low cost loans.

Cluster financing model approach to lending is intended to provide a full-service approach to cater to the diverse needs of MSME business units operating in a particular region and within a distinct, well defined business cluster such as leather making or food processing. Financial service providers have been using this approach to identify clusters and organize them by similar data points that allows for predictability around businesses’ capacity to service debt, risk profiles and product needs.

Traditional microfinance business models implemented by NBFC (Non Banking Fianncial Companies) MFIs (Microfinance Institutions), Small Finance Banks using Joint Liability Group (JLG) model, to provide collateral free loans to low income segments primarily from the micro and small enterprise categories. The JLG model is also primarily constituted by women members of the households that operate the enterprises seeking credit from financial institutions.

Market Size (USD)Describes the value in USD of a potential addressable market of the IOA.
> USD 1 billion
Critical IOA UnitDescribes a complementary market sizing measure exemplifying the opportunities with the IOA.
The credit gap for MSMEs stands at ~USD 397 billion in India

The Indian microfinance sector (including the SHG Bank Linkage Programme) grew 25% (annualised) in Q1FY2019 to ~USD 3,005 billion. The growth was supported by good collection efficiency, continued investor support to microfinance institutions (MFIs), funding availability and demand for microcredit.(16.13)

As per the National Sample Survey (NSS) (2015-16), there were 63.3 million unincorporated MSMEs in the country engaged in different economic activities. 99% of these fall in the micro and small enterprise segment. Out of the total estimated number of MSMEs, 32.5 million MSMEs (51.25%) were in rural area and 30.9 million MSMEs (48.75%) were in the urban areas (16.16)

The addressable credit gap to the sector has grown at a CAGR of 37% to USD 397 billion. The addressable debt demand is pegged at USD 565 billion growing at a CAGR of 21% (16.1)

IRRDescribes an expected annual rate of growth of the IOA investment.
> 25%

The value of PE/VC investments in the financial services sector has increased at a CAGR of 51% between 2014-19 while the number of deals has grown at a CAGR of 33%. NBFC and fintech were the largest sub-sectors to receive PE/VC investments both in terms of value and volume. (16.10)

In 2020, Warburg sold partial stake in AU Small Finance Bank Ltd (4th time) at a multiple of ~22x the original investment (IRR of ~56-60%, including dividends, based on first-in-first-out methodology) and expects to earn ~10x in dollar terms (~15x in rupee terms) at the time of exit. (16.11)

As per VCCircle data from August 2019, Warburg and Kedaara Capital made similar high IRRs from a partial exit in AU Small Finance Bank Ltd. (16.11)

Venture capital fund Sarva Capital has made a multi-bagger exit from its five-year-old investment in Veritas Finance Pvt. Ltd., a NBFC lending primarily to MSMEs. The fund recorded an almost eight-fold multiple on invested capital and about 80% internal rate of return (IRR) in rupee terms. Such returns on investments are far higher than the 20-30% IRR that private equity and venture capital firms typically chase in India. (16.12)

TimeframeDescribes the time period in which the IOA will pay-back the invested resources. The estimate is based on asset expected lifetime as the IOA will start generating accumulated positive cash-flows.
Short Term (0–5 years)

The gestation period for MSME lenders in India is less than 5 years with investors making successful exits in a short investment timeframe.

Warburg invested in AUF Small Finance Bank Ltd. in 2 tranches in 2012 and 2014, and has made partial exits in August 2019 and July 2020. (16.11)

ACCION Venture Lab invested in Aye Finance, a MSME lender, in early 2015, and divested its investment in January 2020. Over the last two years, Aye has grown from Rs 500 crore to over Rs 1,500 crore of AUM (Assets Under Management) using technology as a backbone to scale the business. (16.17)

Average Ticket Size (USD)Describes the USD amount for a typical investment required in the IOA.
In 2019, at USD 9.1 billion, PE/VC investments in the financial services sector in India was up by 20% compared to the previous year. (16.10)
Market - Volatile
As many MSMEs mainly operate in the informal space, assessing their creditworthiness can be difficult due to information asymmetries, particularly with respect to the financial performance of their businesses. (16.36) This has led to hesitation on part of lenders to service MSMEs at scale as they continue to consider the segment as high risk. Even if serviced, the ticket sizes are not adequate for MSME’s working capital needs.
Product/Service design obstacles
Consultations with investors and sector experts also showed that lending models for MSMEs need to be differentiated from traditional microfinance models. Standardized products do not work and specificity in product design by MSME cluster or supply chain needs to be prioritised to ensure customer stickiness and subsequent.
Product/Service design obstacles
Fintech solutions in the MSME lending space have the ability to create a digital footprint using alternative data for MSMEs but lack the ‘feet on the ground’ approach that traditional NBFCs have decades of experience of, thereby curtailing their understanding of the last mile market. This also leads to the inability of players to underwrite risks and offer competitive products to the MSME segment.
Sustainable Development Need

According to the National Sample Survey (NSS) (2015- 16), the MSME sector has created over 110 million jobs across rural and the urban areas in the country, thereby playing a crucial role not just in the economy and reducing regional, social and economic imbalances (5.9).

Access to finance and cost of credit have been a concern for the sector with over 84% of the credit demand being met through informal sources. Of the 16% that comes from formal sources, 81% comes from Public Sector Banks, leading to significant opportunities for private sector participation for viably closing the credit gap in the sector (5.10).

Depending upon the source of credit, the interest rates paid on the principal amount, vary between 12% to 200% (chit funds between 12% to 14%, banks between 12% to 20%, and money lenders between 36% to 200%) impacting the sustainability of the respective MSME business models (16.1).

Nearly 49% of MSMEs in India are reported to be financially constrained (16.2). The reasons for this range from limited/fragmented credit history, the informal status of business (unregistered), lack of adequate paperwork to high rates of borrowing for working capital, and lack of appropriate financial products suited to their business needs.

The addressable credit gap to the MSME sector has grown at a CAGR of 37% to USD 397 billion. The addressable debt demand is pegged at USD 565 billion growing at a CAGR of 21% (16.1).

Contribution of the Micro, Small, and Medium Enterprises (MSME) to India’s GDP is 29.7% as of 2019 (5.7) and the share of MSME related products of the total export from India during 2018-19 was 48.10% (5.8).

Gender & Marginalisation

Gender focus for last mile lending models such as NBFC MFIs that primarily channel funds for household based enterprises through women also has a positive outcome by increasing the participation of women as channels of accessing formal credit.

Of the total number of MSMEs in India, 14% are owned by women(16.2) India currently ranks 70th out of the 77 countries covered in the Female Entrepreneurship Index and demonstrates the third-highest gender gap in entrepreneurship across the world. The success of microlenders depends largely on financially supporting women entrepreneurs who are major contributors to the growth of the traditional financial services models such as microfinance institutions and subsequently to India’s economic growth (16.3)

Expected Development Outcome

Access to formal credit by MSMEs with the potential to improve economic resilience of businesses and households, especially for underserved and low resource populations

Potential reduction in exploitation of MSMEs by informal sources of credit that charge usurious rates of interest

Potential for established regional players with in-depth knowledge of micro markets, low-cost distribution channels and risk management approaches, to provide access to credit to MSMEs beyond the Tier I cities

Potential for improved data history for MSMEs using alternative data sources such as taxation related information, utility bills payment history, bank account statement analysis in the absence of documented cash flows allowing access to unhindered and unrationed credit and other financial services.

Gender & Marginalisation

Improved access to credit for women-owned MSMEs, leading to improved participation of women in financial decision-making at both business and household levels.

Primary SDGs addressed
1 - No Poverty
No Poverty (SDG 1)

1.4.1 Proportion of population living in households with access to basic services

8 - Decent Work and Economic Growth
Decent Work and Economic Growth (SDG 8)

8.10.2 Proportion of adults (15 years and older) with an account at a bank or other financial institution or with a mobile-money-service provider

9 - Industry, Innovation and Infrastructure
Industry, Innovation and Infrastructure (SDG 9)

9.2.2 Manufacturing employment as a proportion of total employment

9.3.2 Proportion of small-scale industries with a loan or line of credit

Secondary SDGs addressed
2 - Zero Hunger
Zero Hunger (SDG 2)
3 - Good Health and Well-Being
Good health and well-being (SDG 3)
5 - Gender Equality
Gender Equality (SDG 5)
10 - Reduced Inequalities
Reduced Inequalities (SDG 10)
17 - Partnerships For the Goals
Partnerships For the Goals (SDG 17)
Directly impacted stakeholders
People
Access to credit for income-generating activities by low-income consumers from underserved regions builds the financial resilience of households and businesses.
Gender inequality and/or marginalization
Gender inequality and/or marginalization: Primary outreach of NBFC MFIs is to women who are the gateway for their households to access formal credit. This has the potential to increase entrepreneurship among women and improve their participation in financial decision making within the household and for their businesses.
Corporates
The business models to provide credit and other financial services are reaching potentially unserved and unbanked regions and people.
Indirectly impacted stakeholders
People
Job creation at a local level such as rural locations, spurring economic growth at sub-national levels with subsequent impact on the growth of national economy with significant contribution to India's GDP (MSMEs contribute 29.7% of GDP and 49.66% of Indian Exports) (16.9)
Outcome Risks

Attrition of consumers between loan cycles may lead them to revert to negative coping mechanisms for their financial needs and reduce the intended impact of the business model.

Impact Risks

Despite regulations, if consumer protection measures are not adequately implemented there is a risk of negative outcomes (overindebtedness, multiple lending from different institutions).

What

Access to credit for income generating activities by low income consumers from underserved regions, builds financial resilience of households and businesses.

Who

The business models to provide credit and other financial services are reaching potentially unserved and unbanked regions and people

Risk

Attrition of consumers between loan cycles may lead them to revert to negative coping mechanisms for their financial needs and reduce the intended impact of the business model

Impact Thesis

Enhancing productivity and economic resilience of micro and small businesses through access to working capital and debt financing for their business needs.

Policy Environment

The central bank for India, RBI, launched a National Strategy for Financial Inclusion 2019-2024 with the vision to lay down the strategy for providing access to formal financial services affordably, broadening and deepening financial inclusion, promoting financial literacy and consumer protection. The key pillars of the strategy include universal access to financial services, providing a basic bouquet of financial services, access to livelihood and skill development, financial literacy and education, consumer protection including the establishment of grievance redressal mechanisms, effective coordination between different players in the ecosystem and leveraging technology for sustainable financial inclusion (16.18) In 2014, GoI announced PMJDY as the National Mission for Financial Inclusion to ensure access to financial services, namely, Banking/Savings & Deposit Accounts, Remittance, Credit, Insurance, and Pension in an affordable manner. (16.19) After 2018, once the scheme reached a critical mass with 80% bank account coverage, it was extended with the focus on the opening of accounts shifting from “every household” to “every unbanked adult”. (16.20) GoI launched the Stand Up India scheme in 2016. The Scheme facilitates bank loans between Rs.10 lakh and Rs.1 crore to at least one Scheduled Caste/ Scheduled Tribe borrower and at least one Woman borrower per bank branch for setting up greenfield enterprises and aims to benefit 250,000 borrowers (16.21) A Certified Credit Counsellors (CCC) scheme was launched in 2017 by Small Industries Development Bank of India (SIDBI) for creating a structured mechanism to assist MSMEs in preparing financial plans and project reports to facilitate banks in making informed credit decisions. Web portals like the ‘Udyami Mitra’ and ‘psbloanin59minutes’ have also been launched to make access to credit more seamless for MSMEs. Trade Receivables Discounting System (TReDS) platforms, an institutional mechanism set up to facilitate the trade receivable financing of MSMEs from corporate buyers through multiple financiers, have been set up to address the problem of delayed payments to MSMEs. Pradhan Mantri Mudra Yojana (PMMY), a scheme to finance small business enterprises has been launched in April 2015 whereby lending institutions would finance to micro-entrepreneurs up to ₹10 lakh. Interest subvention scheme has been launched for MSMEs to reduce the cost of borrowings. (16.22) The COVID19 pandemic and its impact on MSMEs led to some critical policy decisions by GoI to boost the sector. A collateral-free, automatic loan with USD 40 billion outlay to benefit 4.5 million MSME units was announced by the Finance Minister in May 2020. Under the provision, business units with more than USD 3.5 million in loan outstanding and with USD 13.5 million turnover will receive credit backed loans of over 4 years tenure with the potential benefit of 12-month moratorium on principal repayment. Also, a subordinate debt fund for stressed MSMEs with an outlay of ~USD 2.7 billion has been announced to benefit 200,000 business units. Under this fund, GoI will also provide ~USD 0.5 billion towards partial credit guarantee to banks who will in turn lend to MSME promoters for equity infusion into their respective enterprises. Finally, a Fund of Funds announced by GoI to infuse ~USD 6.7 billion equity in MSMEs will cater to more than 2.5 million MSMEs with an initial corpus of ~USD 1.3 billion. The fund will help MSMEs to improve their “growth potential and viability” even as they “face a severe shortage of equity”. The fund will enable MSMEs to expand in size and capacity and would also encourage them to list on the main board of the stock exchange. (16.23)

Financial Environment

Financial incentives: RBI, in August 2020 announced putting in place an incentive framework for banks to address the regional disparities in the flow of priority sector credit.(16.30) Bank credit to MFIs (NBFC-MFIs, societies, trusts, etc) extended for on-lending to individuals and also to members of SHGs/JLGs is eligible for categorisation as priority sector advance under respective categories viz., Agriculture, Micro, Small and Medium Enterprises, Social Infrastructure and Others (16.31)

Fiscal incentives: GoI slashed corporate tax to 22%, and ended Minimum Alternate Tax (MAT) to revive economy as part of the fourth phase of post-budget economic stimulus measures in September 2019. The base corporate tax for existing companies was reduced to 22% from current 30%; and for new manufacturing firms, incorporated after October 1, 2019, and starting operations before March 31, 2023, to 15% from current 25% (16.33)

Other incentives: As of March 2018, banks can reckon the entire outstanding portfolio to MSMEs, engaged in providing or rendering of services as defined in terms of equipment under MSME Act, 2006, under priority sector without any credit cap (16.32) COVID 19 measures: To improve market access measures for MSMEs, global tenders will be disallowed in government procurement tenders up to ~ US$ 26.67 million. This is aimed at supporting ‘Make in India’ initiative and will increase business for MSMEs (16.34) Special Liquidity Scheme for Non-Banking Finance Companies (NBFCs), Housing Finance Companies (HFCs) and Micro Financial Institutions (MFIs) to be launched with ~ US$ 4 billion where investments will be made through primary and secondary market transactions, in investment grade debt paper of NBFCs/HFCs/MFIs, which will be fully guaranteed by the government. Such a move will supplement other measures by RBI and the government to enhance liquidity in the economy (16.34)

Regulatory Environment

To widen financial inclusion, RBI has issued differentiated banking license viz., Small Finance Banks (SFBs), and Payments Banks in 2015 to expand the scope of banking services for underserved regions and low-income populations. SFBs offer basic banking services such as accepting deposits and lending to unserved and underserved populations, including small businesses, small and marginal farmers, micro and small industries, and the unorganized sector. Payments Banks on the other hand can accept deposits and remittances but cannot lend. The primary target group for Payment Banks is migrant labor and low-income households operating in the unorganized sector. (16.24) Bank loans to MSMEs, for both manufacturing and service sectors, are eligible to be classified under the priority sector lending norms that mandate a total of 40% of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure to be dedicated to priority sectors like Agriculture, MSMEs, Education, Housing, social infrastructure, Renewable Energy, among others. To ensure that MSMEs do not remain small and medium units merely to remain eligible for priority sector status, these units will continue to enjoy the priority sector lending status up to three years after they grow out of the MSME category concerned. (16.25) RBI mandates all NBFC-MFIs to become members of recognized Self Regulatory Organizations (SROs) to lay greater responsibility on industry associations and ensure that the financial inclusion mandate set out by the central bank is duly monitored and complied with. (16.26) To solve the problem of delayed payments to MSMEs, RBI laid down guidelines for the operationalization of Trade Receivables Discounting System (TReDS). TReDS was put in place to facilitate Electronic Bill Factoring Exchanges, which could electronically accept and auction MSME bills so that MSMEs could realize their receivables without delay. As of now, only 3 companies have been licensed by RBI to practice TReDS. (16.27) To strengthen the grievance redressal system, among other measures, suitable mechanisms in the form of the Ombudsman Scheme by RBI, IRDAI, and PFRDA have been put in place. Further, SEBI has also instituted a SEBI Complaints Redressal System (SCORES) (16.27) To facilitate capital raising by SMEs and to provide for easier exit options for informed investors, trading of specified securities of small and medium enterprises (SMEs) including start-up companies on Institutional Trading Platform (ITP) in SME Exchanges was launched in 2013 (16.28) In a bid to increase the digitization of MSMEs, key measures taken by the government in the form of Goods and Services Tax (GST) and wider availability of Aadhaar based KYC has provided opportunities to fintech companies to provide data and technology-based services to MSMEs.(16.29)

Private Sector

Investors have been bullish in the BFSI sector. Emerging technologies to improve digital outreach of financial services that promise to substantially reduce operational costs, a strong policy push in the form of universal banking schemes and a largely amenable and well-regulated sector makes for a strong case from an investment point of view. PEs: Warburg Pincus, KKR, Gaja, Gawa, Gojo, Maj Invest, Samara Capital, Capital G. VCs: Accel Partners, A91 Partners, Sequoia Capital, SAIF Partners, SIDBI Venture Capital. Impact Investors: ASPADA, NABARD, Blue Orchard, Lok Capital, Omidyar Network, ACCION- Quona Capital, Caspian, Michael and Susan Dell Foundation, International Finance Corporation (World Bank Group) among others.

Private Sector

Companies: MSME lending: AYE Finance, Magma Fincorp, Kinara Capital, Vivriti Capital, Lendingkart technologies, Finova Capital Pvt. Ltd, Vistaar, Intech, Indify technology, Mintify, Veritas Finance, among others. These companies are focused on lending to MSMEs through technology (Fintech) driven business models with focus on either cluster based financing, Peer to Peer lending or value chain financing. NBFC MFIs: Spandana, Fusion Microfinance, Satya Microfinance, Aarohan, CreditAccess (There are 55 NBFC MFIs in India) (16.35) Small Finance Banks (SFBs): Equitas, Ujjivan, AU Financiers, Suryoday, Janalakshmi, ESAF, Equitas, Utkarsh, North East SFB, Capital. These are differentiated banking entities licensed by RBI to provide banking services to underserved geographies and low income populations. Cooperative Banks: SEWA, Manndeshi.

Non-Profit

Pradan, Grameen Foundation, CARE, Manndeshi Foundation, Oxfam, Catholic Relief Services, Rajeev Gandhi Foundation, World Bank, NABARD (National Bank for Agriculture and Rural Development), Regional Rural Banks, SIDBI (Small Industries and Development Bank of India). Besides offering financial services, these organizations are also engaged in offering advisory support to financial service providers including innovations to further financial literacy to last mile consumers.

country static map
rural
India: Countrywide
Traditional microfinance institutions in India already have a nearly ubiquitous presence with 615 of 739 districts being covered by these institutions. However, 210 districts covered by MFIs constitute 80% of the total portfolio outstanding. 11% of the total loan outstanding for these institutions that include Banks, NBFCs, SFBs and not for profit MFIs, is constituted by districts covered under GoI's The Aspirational Districts Programme (16.4) Most of the Fintech companies are headquartered in metro cities and in the absence of ‘feet on the ground’, struggle to run efficient assessments to optimally serve clients at the last mile. Collaborative business models where Fintech companies tie up with NBFCs and Agent Network Management companies (Business Correspondents) to take products/delivery channels to an already captive market is one of the options for exponential scale and depth of outreach. It is important to note the presence of manufacturing and service clusters where financial service providers can focus their attention. The state of Uttar Pradesh has the largest number of estimated MSMEs with a share of 14.2% of the total MSMEs in the country. West Bengal comes as close second with a share of 14%, followed by Tamil Nadu and Maharashtra at 8% each (16.5). Besides the above, RBI has also issued guidelines to financial service providers to prioritise their operations by geography: RBI guidelines for Small Finance Banks: There will not be any restriction in the area of operations of small finance banks; however, preference will be given to those applicants who, in the initial phase, set up the bank in a cluster of under-banked States/districts, such as in the North-East, East and Central regions of the country (16.6) RBI guidelines for NBFC-MFIs: Any new company applying for an NBFC MFI license has to necessarily furnish details about the break up of assets allocated to rural and urban areas. In the same vein, NBFC-MFIs are encouraged to fix their internal exposure limits to avoid any undesirable concentration in specific geographical locations (to avoid overexposure to the same catchment area by several players) (16.7) The general guidance for Banks for lending under the Priority Sector Lending (PSL) norms: The banks are advised to draw up a roadmap for having banking outlets in villages with populations of more than 2000 (in 2009) and less than 2000 (in 2012). Subsequently, the banks are advised to open brick and mortar branches in villages with a population of more than 5000. The banks are also required to prepare Financial Inclusion Plans for a period of 3 years comprising key parameters viz., modes of delivery of financial services, access to Basic Savings Bank Deposit Accounts (BSBDAs), and transactions through the Business Correspondent Channel. (16.8)
Sector Sources
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IOA Sources
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