“A customized technology-driven solution to unlock the growth potential of micro-enterprises is the need of the hour”

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By Utpal Isser

Credit and financing for MSMEs: Rural India is home to over 3.5 crores of micro-enterprises. These are agricultural entrepreneurs, micro-enterprises such as traders selling groceries and consumer goods, etc., service providers such as vehicle repair services, electronics and electrical products and agricultural equipment, small manufacturers such as reverse osmosis plants, small agricultural equipment, etc. micro-enterprises play a central role in the overall economic development of a country in terms of growth, improved lifestyle, job creation and convenience. On top of that, data and smart devices have reached the nooks and crannies of rural India, resulting in a significant increase in openness to digital experiences and solutions compared to where we were less ago. ten years old.

While the entrepreneurship landscape as a whole is becoming increasingly aware of their importance and potential in urban and metropolitan cities, rural micro-enterprises are still unable to integrate seamlessly into financing, distribution and mechanization services, all essential conditions to help this transient sector move into the next orbit to achieve competitiveness and large-scale production.

Despite continued policy guidance, easy access to finance and lack of technical know-how have been the main impediments to the growth of this sector. Overall, the traditional banking system of our country facilitating access to credit, necessary to support ancillary services, is still weak compared to existing needs. Against this backdrop, micro-enterprises struggle to access adequate credit and leverage technology to facilitate business, both of which are key to ushering in unprecedented growth for the sector.

The current state of affairs: the potential for the use of credit facilities and the demand for credit

In 2020, our country had more than 749 million Internet users across the country. However, many of the 1.3 billion people still lack access to basic banking services. Additionally, data from Global Findex showed how 5% of Indians accessed a financial institution account from their phone or internet, and only 2% of the population had a mobile money account. This essentially tells us that the infrastructure for technology-enabled rural finance exists, but that the threshold to facilitate technology adoption needs to be crossed. Rural-focused fintech startups can effectively facilitate this transformation.

In terms of financing demand, the total demand for external credit is estimated at 37 trillion rupees while the overall supply of financing from formal sources is estimated at 14.5 trillion rupees. Therefore, the overall credit gap for the broader MSME sector is estimated to be Rs 20-25 trillion, according to the Reserve Bank of India.

Barriers to growth are barriers to financial inclusion

In credit markets, adverse selection and moral hazard are exacerbated in the case of micro-enterprises that have no loan history or collateral to secure a loan. Micro-enterprises also generally suffer from higher loan rejection rates than others due to their higher risk profile. It is safe to say that this funding gap affecting micro-enterprises is essentially a growth capital gap.

Assessing the creditworthiness of micro-enterprises is another problem related to information asymmetry. Most rural businesses struggle with the lack of standardized banking data, cash flow details, etc. required during the credit assessment.

Regulatory gaps often cause permanent problems for micro-enterprises, as they hinder financial access even if the government has implemented measures to make access to credit for micro-enterprises available. In terms of lender coverage, the depth of credit is very low in large parts of the rural countryside. Finally, traditional credit delivery systems lead to high turnaround times, which tend to hamper the business processes of micro-enterprises.

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How Technology Meets Challenges

In order to meet day-to-day operations and acquire productive assets, micro-enterprises need working capital and term loans. Take, for example, an onion farmer in Maharashtra who employs labor for manual sowing and transplanting. Now, technology-driven access to agricultural mechanization, finance, and distribution can potentially reduce cultivation costs two to three times, improve productivity, and reduce dependence on manual labor.

Focused on the household, a new approach to lending essentially treats the whole rural household as the borrower rather than as an individual. In the case of the onion farmer, the income of the whole family can be treated as working capital, which will have a positive impact on the assessment of the repayment capacity of the borrower.

Fintech startups working in rural areas can use proxies such as asset size and quality (house/land/farm equipment/number of dairy animals), bank statements, GST data, and standardized dashboards to assess the solvency of micro-enterprises. Uniformity and simplification of different loan application formats and assessment processes in line with lessons learned from supply chain finance and cash flow escrow are needed for faster decision making and reduced execution times.

Moving on, in the absence of collateral, borrower underwriting often involves a high-tech, high-touch model, a significant innovation in the way small business loans are assessed, underwritten and managed. Rural lending startups that focus on leveraging technology platforms can efficiently complete loan applications from procurement to disbursement in less than 7 days by using algorithms to analyze data points from various sources such as GST data, IT statements, bank statements, etc.

Electronic KYC, paperless (digital) applications, fast loan underwriting, and a focus on customer service can redefine micro business lending. AI-based solutions to convert manual processes into intelligent and interactive voice-based chat and BOT solutions will not only improve the efficiency of ground crews, but also provide an enhanced digital experience for customers. The lack of rural business data can be addressed by collecting and physically verifying all non-standardized details and scanning them before credit algorithms are applied. It increases the TAT but allows timely access to credit.

Combined above with financial education campaigns and a focus on financial education, especially for women and children and the provision of technical know-how on how to improve returns in agriculture through apps and call centers run in vernacular languages, it can help transform these rural businesses into big growth. segment that would contribute to the growth of the national economy due to the sheer size of this segment.

Ultimately, a custom technology-driven solution to unlock the growth potential of micro businesses is the need of the hour. One that instills confidence in the system by acting as a last mile partner, includes touch points for rural customers by maintaining a physical and digital presence and deliberately addresses the nuances centered on micro business growth in India rural.

Utpal Isser is co-founder of SarvaGram. The opinions expressed are those of the author.