Credit and finance for MSMEs: The significance and need for financial inclusion to positively impact enterprises and individuals from the top to the bottom of the pyramid has increasingly been recognized by policymakers globally. With respect to enterprises, the financial inclusion of MSMEs, which form the backbone of India’s economic growth to $5 trillion gross domestic product, is at the centre of economic diversification and growth challenges countries face.
Financial inclusion is referred to enabling access to affordable financial products and services for individuals and businesses. In India, access to financial products and services, for instance, affordable bank credit, has been low around 15 per cent among small businesses, as per industry reports. While financial inclusion as an idea to boost economic growth isn’t new, it started to gain attention from policymakers in the past few years only.
“We started talking about financial inclusion about 15-20 years ago, but the initial progress was slow. Over time we have moved far ahead,” said Archana Pandey, Chief General Manager – RRBs, RSETIs, Financial Inclusion and CSR, Bank of Baroda at the Inclusive Finance Conclave on Thursday.
Organised by Financial Express Digital, the one-day conclave in Delhi brought together regulators, policymakers, implementation agencies, financial sector enablers, and practitioners to share perspectives on enhancing financial inclusion for small businesses in the country.
The inclusion won’t just help with the country’s growth and employment generation but also contribute to financial stability, said panellists in the first-panel discussion on banking the unbanked for inclusive growth at the conclave.
“For SIDBI, financial inclusivity started 30 years ago. We started from scratch and have played a big role in making MSMEs a big industry,” said Ravi Tyagi, Chief General Manager, SIDBI in the panel discussion.
Gursharan Rai Bansal, CGM & CSMO, India Post Payments Bank; Sadaf Sayeed, CEO, Muthoot Microfin and Gayathri Parthasarathy, India Financial Services Sector Leader and Global FS Technology Leader, PwC were also part of the first panel.
“From the micro-finance perspective, we don’t talk about opening accounts and giving loans. It is an entire package of services. We have moved from financial inclusivity to digital and financial literacy,” said Sayeed.
The evolution of financial inclusion has arguably stemmed from the digital infrastructure built in the country in the recent past. For instance, from using worn-out bank notes in markets to buy groceries and other items less than a decade back to digital payments via smartphones, India has built a strong base of digital architecture to develop applications for the greater public good.
Advances in digital payments built on India Stack – essentially a technology foundation comprising of Aadhaar, UPI, eKYC and Digilocker have helped promote financial as well as social inclusion in the country. However, according to experts, a focus is needed on digital financial inclusion beyond just digital inclusion.
“When we look from a consumer’s perspective, a few products are great utility providers. We are a developing nation; we need to fill the gaps in our systems. There are a lot of policies on digital inclusion and financial inclusion, but a clear policy for digital financial inclusion is missing,” said Arpita Mukherjee, Professor, Indian Council for Research on International Economic Relations in the second panel on strengthening digital financial services infrastructure.
Apart from the subject of financial inclusion, perhaps among the biggest initiatives taken by the government of late has been to develop digital infrastructure in the form of the Open Network for Digital Commerce (ONDC) for businesses of every size to have equal access to the vast e-commerce opportunity.
“When we reduce things to building blocks, it allows you to reconstruct them. We keep things simpler and build things on each other. We will make commerce easier, and then add on utility to it such as financial services and other things,” said Shireesh Joshi, Chief Business Officer, ONDC.
Opening up the existing platform-centric e-commerce market, wherein buyers and sellers transact only through a common platform, to a network-centric approach to transact from any platform is expected to boost digital adoption among small businesses.
The panel was also joined by Dilip Kumar Modi, Founder, Spice Money; Seema Prem, Co-founder and CEO, FIA Global; and Sugandh Saxena, CEO, Fintech Association for Consumer Empowerment (FACE).
While financial inclusion and digital channels for enhancing it are critical, it might also be important to see its success from the gender lens to ensure the inclusivity of women particularly. This is because as per industry reports, 42 per cent of women in India in 2021 had an inactive savings account compared to only 30 per cent of men. The difference of 12 percentage points was much higher than the global average of a five-percentage point gap.
Moreover, in terms of credit access, women entrepreneurs have continued to face challenges. For instance, the government’s Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme, which provides credit guarantee to lenders for the collateral-free loans extended by them to micro and small enterprises (MSEs), has a 21 per cent share of women beneficiaries.
According to the data shared in a written reply to a question in the Rajya Sabha by the minister of state in the MSME ministry Bhanu Pratap Singh Verma in March this year, out of 69.04 lakh loan guarantees cumulatively approved as of February 28, 2023, under the CGTMSE scheme since its launch in August 2000, around 14.49 lakh guarantees were approved to women-owned MSEs.
Also, multiple bank accounts of women under the Jan Dhan Yojana by the government had stayed dormant, according to Geeta Goel, Country Director India, Michael & Susan Dell Foundation.
“We covered the low activity rate of women Jan Dhan accounts. Most of the accounts were dormant, despite having higher average bank balances than male accounts. Women mainly lacked basic information like overdraft facilities. There need to be more women banking professionals in order to bridge the gender gap,” said Goel in the third panel discussion on the topic reimaging financial inclusion for women.
Moreover, while a lot of rural women-run businesses and are very disciplined about repayment, they get ignored by the financial institutions because they don’t have collaterals, said Neha Juneja, Co-founder and CEO, IndiaP2P.
In the absence of any common collaterals sought by banks such as land or machinery etc., “there need to be smart alternatives for collateral because rural women are smart. Also, there must be alternatives for documentation, asset management, and consideration of assets,” said Chetna Gala Sinha, Founder and Chair, Mann Deshi Bank and Mann Deshi Foundation.
Also read: Banks’ GNPAs in MSME loans decline to Rs 1.54 lakh crore: MSME ministry
The other panellists in the session were Prabhat Labh, CEO, Grameen Foundation India and Shweta Aprameya, Founder and CEO, ARTH.
The last panel in the conclave stressed on the role of digital literacy and capacity building in taking financial services to the last mile. While successive attempts by the government through programs like the Digital India programme have empowered a large part of the population with basic digital literacy skills, there exists a need to channelise this acquired literacy into economic activities for the whole population to come under the ambit of digital financial inclusion.
“The bigger challenge is about having channels to access the information,” said Vijay Sai Pratap, Co-founder and CEO, Gram Vaani Community Media in the panel discussion.
“A lot of emphasis has been on informing when one should start working. But they should also know how to use their bank account. When someone comes to us for skilling, we teach them about all the facilities they can avail of from their bank accounts,” noted Gayathri Vasudevan, Chief Impact Officer, Sambhav Foundation.
The panel was also joined by Praseeda Kunam, CEO, Samhita Community Development Services; Amit Arora, Senior Rural Finance Advisor, World Bank; and Anil Kumar, National Mission Manager, National Rural Livelihoods Mission (NRLM), Ministry of Rural Development, Government of India.
NRLM is a community-based livelihood mission to challenge rural poverty with a network of 1.4 Lakh financial literacy agents across the country, said Kumar.