By Preethi Rao
Credit and Finance for MSMEs: Women-owned enterprises in India face a financing gap of around 70 percent, according to a study by the International Finance Corporation (IFC), and a large part of this gap can be attributed to ingrained social biases in the financial system. Women are often overrepresented in traditional sectors such as garment making and typically operate businesses from home, leading to low revenue and growth potential.
Data from the NSS 73rd round shows that while male and female entrepreneurs across all revenue categories access loans in similar proportions, the amount of loan accessed is significantly lower among women entrepreneurs (more than 50 per cent below loan amounts accessed by their male counterparts).
On the supply side, women entrepreneurs lack appropriate products that cater to their needs, and procedural requirements such as the need for collateral and credit scores can limit access to finance. On the demand side, inadequate accounting and financial management skills, low credit score and weak financial literacy, amongst several other reasons, can alienate women from access to formal financial services.
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For women-led micro enterprises, the Pradhan Mantri Mudra yojana (PMMY) has been one of the important programmes targeted at facilitating easy access to institutional credit for women. However, women borrowers constituted only 41 percent of the total loan sanctioned in 2018-19 and this was in the shishu category, that is, loan amount of around Rs 50,000. These figures indicate the small loan sizes accessed by women.
Moreover, most female entrepreneurs usually depend on their own savings, loans from family and friends, or micro-loans to finance their business needs. The 6th Indian Economic Census Data indicates that the source of finance for 79 percent of women-led enterprises is their own capital since banks and other financial institutions remain unsure of their business models and the potential or guaranteed returns on loans.
The Value for Women Report highlights that the nature of business practiced by banks, where lending criteria and customer acquisition processes might not consider the unique needs of women, leads to exclusion of many women entrepreneurs. This aspect, coupled with embedded social norms that dictate that most of the family asset titles are under the names of men rather than the women in the family, prevents women entrepreneurs from being able to use them as collateral.
Further, these challenges manifest in different ways. For example, a higher interest rate is imposed on women entrepreneurs for loans, once they are approved. Even when all other observable criteria are identical, women entrepreneurs are 30 percent more likely to need a guarantor. Added to this, men-led businesses generally raise more formal and informal venture capital compared to women-led businesses. For women entrepreneurs, microfinance loans and loans through collectives or self-help groups have been the most common mode of accessing financial support.
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There are many ways in which financial institutions can adopt inclusive practices while catering to women entrepreneurs. For example, alternative credit scoring options can replace the requirement for collateral, allowing women to have access to formal credit and/or better terms of credit. These can take the form of utilizing trading history from digital platforms or compiling a score based on cash flow analysis, household income and behavioral data. As gender-lens investing gains momentum, the implicit investment bias can be addressed by using a two-pronged approach – making investors more sensitive to gendered aspects of barriers to financial access, and building capacity of women entrepreneurs to pitch their business ideas and funding requirements.
A diversity of financial products (term loans, working capital and so on) is required to cater to the women-led business at different stages and for various needs. Moreover, credit terms need to be adapted to their repayment ability (for instance, daily repayment, “sachet loans” and so on). Blended financing mechanisms can help provide access to finance at subsidized rates of interest. Some suggestive solutions include – donors/philanthropic organizations providing first loss default guarantee, combination of seed capital along with debt at a lower interest rate, and providing a ‘missing installment’ guarantee (such as the moratorium extended during the pandemic) to address natural calamities or other such emergencies.
In conclusion, through innovative approaches and greater institutional support, there is scope to considerably reduce the credit gap persistent in the women entrepreneurship segment in India.
Preethi Rao is Associate Director at Krea University’s research centre LEAD.