An analysis of micro-loan applications shows that entrepreneurs would fare better if they are trained on how to avail credit
The importance of the micro, small and medium enterprises (MSME) sector in India cannot be emphasized enough. Providing employment to about 120 million people, contributing about 30% of our gross domestic product (through manufacturing and service activities) and 45% of overall exports, MSMEs are crucial for promoting inclusive growth and encouraging innovation. In this context, nano-enterprises hold a special place. These are snacks counters, catering services, beauty salons, fashion boutiques, kirana stores and the like. In terms of volume, micro-units constitute 99% of all MSMEs, of which nano-enterprises form a considerable majority. The 73rd Round NSSO results of 2015-16 indicated that there are 62 million informal enterprises with less than 20 workers, 65% of which were single-worker units. These are survivalist enterprises with a few lakh rupees in annual turnover. To ignore this sector is unwise.
The Centre recognizes this. In order to bridge gaps in access-to-credit for small business owners, it had launched several schemes. For instance, the PM MUDRA (Micro Units Development and Refinance Agency) scheme and the Emergency Credit Line Guarantee Scheme, through which collateral free credit up to ₹10 lakh was to be offered. These schemes, unfortunately, have not been as successful as envisaged. Disbursements are slow, which in turn affect MSMEs’ books of accounts. Banks have not necessarily been enthused by the schemes either. Awareness is another problem. For instance, MSMEs trying to avail these loans often approach a bank without any business plans. Then there is the PM SVANIDHI (PM Street Vendors AtmaNirbhar Nidhi), which offers street vendors loans of ₹10,000, but even this programme has faltered on account of implementation snags.
A major problem is lack of data and knowledge on nano-units. By definition, most of these micro enterprises are informal in nature and therefore not enumerated in most surveys. And ground-level data gathering is difficult.
Recently, we examined a large dataset of nano enterprises collected by deAsra Foundation, a nonprofit organization based in Pune, which has been assisting a large number of micro enterprises for several years. One of its programmes, an MSME loan initiative, was designed to match borrowers with a potential micro-lending financial institution (non-banking finance companies), thus reducing the search cost for both the parties involved. Entrepreneurs had to submit biographic, business and financial information, on the basis of which they were screened in. Through this single-window portal, entrepreneurs could apply to multiple NBFCs. Eligibility did not mean loan disbursement, but that eligible applicants would be considered.
Since all entries were done online, the exercise yielded a rich, first-of-its-kind, novel ground-level dataset on 3,000+ nano-enterprises, most of whom needed loans of less than ₹1 lakh.
The most important finding was that only 49% were found to be eligible for a loan from one NBFC or another. The criteria that NBFCs laid down for eligibility included the supply of an applicant’s postal pin code, loan amount, business type, business age, and if the applicant had a UPI identity, apart from address proof, bank statements and co-borrower’s identity.
We realized that NBFCs valued these parameters differently. Logistic regression, a statistical technique, indicated that the pin code, loan amount and business age were most important for most NBFCs. The postal pin code was important because NBFCs perhaps preferred applicants in specific locations. We also found that applicants with a business address proof, co-borrower (a guarantor, that is, often a relative) and bank statement were more likely to qualify. It was also found that individual/proprietorship business has a significantly higher likelihood of qualifying than a private limited or partnership firm.
At another level, the results of our study indicated that females were more likely to be eligible than males. If one looked at age, loan candidates with ages between 30-40 years formed the dominant applicant group, although older ones (40-50 years) had higher eligibility chances (see chart). In terms of business age, businesses which were 11-20 years old were the predominant eligible group, closely followed by those which were upto 10 years old. We also noticed that different NBFCs had different preference for business type (industry/sector), with no clear preference for one against the other, indicating that they were industry-agnostic.
We also examined the cases of 131 candidates who secured loan from one of the NBFCs, and estimated default statistics. Those with higher valued-loans did not default more than those with smaller amounts. Read differently, this may indicate small loans tend to be defaulted upon more. At the same time, women borrowed a higher number of small loans and defaulted less, which supports the microlending scholarly narrative too. We also realized that most defaults were on working-capital loans.
Since small loans and working-capital loans were suffering from higher defaults, it appears that there is a need for training these micro-entrepreneurs. While young entrepreneurs applied more for loans, the older lot had better chances of being eligible, which suggests that experience is considered useful. In turn, this points to the need for training. Think about it: Many entrepreneurs who had bank accounts claimed they did not have bank statements and NEFT facilities, which indicates a lack of knowledge that can easily be addressed by training. Policy guidelines often miss the importance of this.
This study allowed us to better understand what challenges micro-businesses face, specifically with respect to access to funds, in the country. More importantly, it also illuminated areas that require intervention. For instance, lack of financial literacy and the need for training and awareness are acute. We also learnt that for availing credit from microlending programmes, a business’s geographical location could be crucial. While for this study, the majority of entrepreneurs were from Maharashtra, we hope that wider micro-level analyses of small businesses emerge from the ground that can be used to inform public policy.
Pradnya Godbole and Mayank Patel contributed to this article with data from deAsra Foundation.
Yugank Goyal & Nikhilla B. are, respectively, associate professor at FLAME University and an independent researcher.