IPL fever has once again gripped the nation! Every gully, mohalla, dusty village street and the tony club seems to reflect the nation’s fascination with the game. The rise to superstardom beckons; and an enthusiastic country watches closely. As one works at the bottom of the pyramid, this cannot but fascinate. The ability for the simple to dream big; be it the gully batsman or the bowler from the hinterland, the ecosystem seems to be working in providing the platform, incentive and impetus needed to make it to the big league.
Why cannot it be the same for our MSMEs?
The Union Cabinet recently approved the change in the definition of MSME from one based on investment in plant and machinery to one based on sales turnover. While this is awaiting Parliament approval, it is a step in the right direction to improve the ‘Ease of Doing Business’.
With a $2.8 trillion economy and growth hovering at about 7%, India makes for a pretty picture. However, the flipside is the low per capita ranking at 126 and about 20% of the population still reeling under poverty call for urgent action. Micro, Small and Medium industries can play a crucial role in boosting entrepreneurial activity on the ground leading to improved incomes and enhanced access to social services.
While much has been said and written about MSME finance, I would like to focus on just one aspect of this vast canvas – social enterprises serving the poor and excluded populations. Businesses with a defined sense of purpose to respond to societal challenges have been termed as social enterprises and are now gaining momentum as a new horizontal in the MSME sector. As an impact investor, the value proposition of financing such socially driven, scalable enterprises is immense;
- The adoption of Sustainable Development Goals, it is widely estimated, has opened $12 trillion of market opportunities in food and agriculture, cities, energy and materials, and health and well-being alone. However, access to capital for these enterprises remains severely constrained.
- Publically available data tells us that out of the 51 million MSME units, only 5 million units have access to formal credit, clearly indicating a significant need.
- IFC estimates a gap of $2 trillion in funding for MSMEs in emerging economies like India.
The Challenge
Rising NPAs (Non-Performing Assets) and banking sector frauds have turned the banks to be more cautious, especially in the MSME / social enterprise sector contributing to the already lengthy loan procedures. Also, lack of access to formal credit and therefore, a credit history creates a vicious loop in the cumbersome process of raising finance.
The Solution
Several scalable innovations under the social business category often fail to see the light of day due to lack of financing. Today, venture debt companies are filling in the financing need of the MSMEs at a stage where the exposure for a traditional bank or NBFC is not conducive. Interestingly, we are seeing banks and venture debt firms join hands to work on collaborative modelsofMSMEfinancing, thereby making it lucrative for both parties.
We at, Grameen Impact Investments, offer debt financing to enterprises in social sectors namely – Affordable Healthcare, Affordable Education, Financial Services (FinTech & Inclusion), Skill Development, Agriculture, Clean Energy and Impact Innovation to help scale these enterprises to augment their impact.
However, challenges of the 21st century require new age solutions.
Blended financing models can allow MSME to access pools of large mainstream capital for growth. The point of ‘blended finance’ is to use public or charitable funds to attract private money in projects that typically wouldn’t draw this investment.
- Innovations in ‘outcome financing’ or ‘pay for success’ are gathering momentum. These have tremendous potential as capital market players can collaborate with development multilateral agencies to structure innovative financing vehicles that de-risk the investor, ensure the outcomes are well-defined, measured and achieved. Such impact bonds can be replicated in MSMEs working on areas of sanitation, water, education, healthcare, clean energy, agriculture and a vast array of social issues in India.
- Given the perception of risk involved in the financing of MSMEs, crowdfunding has emerged as an alternative source of capital. Crowdfunding enables such enterprises to solicit funds in smaller sums from a large number of investors via the Internet. Today, there are many crowdfunding platforms whose model has evolved from donation and reward-based to debt and equity based. They are used for smaller loans which fulfil the requirement of affordable microcredit at very-low interest rates of around 6% to 10%.
With these innovative frameworks already churning the wheels to close the credit gap in MSMEs, a growth conducive government policy framework is essential to complement and build an enabling ecosystem for MSMEs. Creative use of CSR pools of capital for guarantees and Priority Sector Lending guidelines are tools which policymakers can use to create an optimal ecosystem for MSME financing.
The advent of Fintech
With the fast-changing technological landscape- the emergence of robotics, AI, machine learning and other hi-tech products and services, financing is seeing a rapid shift as well. These services will also lead to a reduction in the cost of capital due to an automated and reduced cost of service. Broadly, fintech can improve access to credit, reduce the price of credit and increase transparency in the system. A collaboration between fintech organisations and banks is a win-win situation as both parties can gain from strengths on both sides to co-create value. The most significant benefit the banks see with this collaboration is the speed-to-market and convenience which is the need of the hour for the MSMEs. For instance, banks and NBFCs have started seeing value in alternate credit scoring methods and have become much more forthcoming in adopting them. Measures like these can pave the way for an ecosystem which will be inclusive of MSMEs.
Conclusion
A mix of traditional credit facilities from banks and innovative financing mechanisms will be critical for the growth of MSME in recent times. The policymakers need to simplify the complex regulatory policies in place and create strategies for greater financial inclusion of the MSME sector. Suitable incentives are required for fin-techs working towards addressing the MSME financing challenges. A holistic environment of access to risk capital, knowledge platforms and policy support will be needed to support India’s growth story built on the pillars of Micro, Small and Medium Enterprises. We are standing today at the dawn of the new opportunity, and if India can get this right, we stand a chance of realising the dream of one day was becoming a truly inclusive and winning society. Just like the IPL!
Royston Braganza, Chief Executive Officer of the Grameen Capital, writes this piece for the May 2018 edition of FICCI’s Financial Foresights.
