By Hardika Shah
Credit and Finance for MSMEs: India is sitting on a gold mine. When tapped, it has the potential to grow the economy exponentially and improve the lives and livelihoods of millions. This gold mine is made up of nano entrepreneurs who run small businesses with an annual turnover of $13,000 (Rs 10 lakhs) to $130,000 (Rs 1 crore). They could be your neighborhood kirana store shopkeepers, beauty shop owners, small-scale manufacturers, food distributors, or wholesalers. Most of these small businesses in India remain informal and deal with cash. Even the businesses that are fully registered and formalized struggle with access to formal credit, often due to a lack of land or property collateral. The recent pandemic has shown us the vulnerability of nano entrepreneurs who are more prone to revenue loss and closures, especially due to a lack of access to working capital.
Typically, nano entrepreneurs are viable businesses with about 10 to 20 workers and some form of fixed assets, machinery, or inventory. But traditional lending relies on property collateral and usually requires lengthy paperwork, something nano entrepreneurs do not have access to because of their small scale. As a result, this sector is heavily under-capitalized. A study by MicroSave Consulting points out that the estimated credit demand for the Indian micro, small, and medium enterprises (MSME) sector is $1,431 billion. However, formal sources meet less than one-sixth of the demand at $229 billion (Rs 16.94 lakh crore), and only 27 per cent of this is directed to microenterprises.
Most nano entrepreneurs who are new to formal credit require support to understand the business loan process, establish credit history via regular monthly payments, and digitize their accounting data. Many of them, especially in Tier 2 and Tier 3 cities, prefer communication in the local regional language rather than English. Therefore, providing access to formal credit is solving only one part of the existing problem. Nano entrepreneurs also need guidance and support through the process.
This is where the “phygital” (physical plus digital) model comes in. It is based on the principle of combining high-tech fintech solutions with a human touch to serve nano enterprises. Through this model, we get nano entrepreneurs to start their credit journey through a digital interface, like an app. To make the process easier, the interface should work on a mobile device, be easy to follow, and be available in local languages, making it intuitive and user friendly for borrowers. If borrowers need help filling out the form, the model should provide access to human customer service in the form of a call center or field representative who can help the borrower in-person to complete the onboarding process and be approved for the loan.
This phygital model allows the first set of borrowers to be onboarded and often encourages them to refer other business owners. It also inspires them to become repeat borrowers as they build support and trust with the company through their customer experience. They can become more comfortable accessing formal credit, which is something many first-time borrowers worry about after negative experiences with traditional and informal lenders.
The high-tech with human-touch phygital model supports the economy in three key ways:
- Increased Business Growth – With timely access to formal credit, nano entrepreneurs get an opportunity to nurture their businesses, directly adding to the economy’s GDP growth. Access to credit helps mitigate the financial vulnerability of this segment thereby enabling them to invest more in their business and its growth.
- New Job Creation – Increased stability and growth of the nano businesses also helps them create employment opportunities and offer livelihoods in local areas and improves the buoyancy of the local economy and community. Over a period of time, these growing nano entrepreneurs become the hub for several other micro-entrepreneurs in the area which emerge to create a supply chain or a distribution channel for the high-growth nano entrepreneurs.
- Quality of Life – Increasing business incomes of nano entrepreneurs enables better investments in their family’s education and skilling journeys and shaping the future of the economy. This is particularly true of women who are likely to spend 90 per cent of their earned income on nutrition, health and educational needs of their families leading to improved communities.
The impact of the phygital model is enormous. By offering a blend of digital and physical support, lenders can serve a larger number of nano entrepreneurs faster while potentially reducing the cost of servicing small-ticket loans. There are over 60 million MSMEs—most of them nano entrepreneurs—in India. If each one gets access to timely credit, imagine the impact it will create on the national and local economies and on the livelihoods of nano entrepreneurs and others. India is sitting on a wealth of entrepreneurial potential. Now is the time to tap it!
Hardika Shah is the CEO of Kinara Capital. Views expressed are the author’s own.