Credit and Finance for MSMEs: Nano entrepreneurs who are new to credit or have no credit or business history need to be given additional risk capital and guarantees to unlock business credit.
Credit and Finance for MSMEs: In the summer of 2010, after working as a labourer for over 15 years, 30-year-old Lukman Ramjan started his bangle business in the bustling markets of Toda Bhim near Alwar, Rajasthan. He rented a small shop at Rs 3,000 per month and ran a business that met the day-to-day expenses of his family. Twelve years later, Lukman was turning 42 and thinking of expanding his business. He wanted his children to enter the trade and earn a living for themselves. To fulfill these dreams, he wanted to buy a bigger shop near the main square of the market and would need a loan of Rs 5-
6 lakhs. However, despite having a well-kept ledger and a bank right next to his shop, he received a loan of just Rs 1.2 lakhs which he used to purchase more stock.
Although Lukman has big ambitions, he is, unfortunately, a part of an overlooked majority – he is a nano entrepreneur.
Nano entrepreneurs are a distinct segment within the micro, small and medium enterprises (MSME). They have an annual turnover of between Rs 10 lakhs and Rs 1 crore and have hyperlocal roots and focus. Despite their size, their impact on the economy is tremendous.
There are more than 10 million nano entrepreneurs in India currently and according to estimates, each nano enterprise employs an average of 1.5 to 2 people. They are largely informal, with a significant majority primarily dealing in cash transactions, and aren’t generally registered on the GST portal. The drive towards Udyam registration is a welcome one and will enable more visibility and formalisation of these entities. If given the opportunity to grow, they will not only create employment for more than 20 million people but also make a sizable contribution to the country’s GDP.
The cost of overlooking nano entrepreneurs
The market size of nano entrepreneur credit is as big as Rs 2 lakh crore, making it the largest potential credit segment in the MSME category with demand growing at over 35 per cent CAGR. Nano entrepreneurs also have strong credit scores, with 65 per cent having an Equifax credit score considered good, very good or excellent.
This would seem to be an ideal segment for lending by any financial institution, but that’s not the reality on the ground. Out of a total 10 million nano entrepreneurs, it is estimated that only five per cent have access to credit through formal sources and 80 per cent have either bootstrapped their businesses through their savings or received support from family and friends. When these entrepreneurs do get a loan, the highest ticket size for an unsecured loan is as low as Rs 2 lakhs and to get a higher amount, they typically need a property collateral which most nano entrepreneurs do not have.
There is a general lack of awareness about this segment, and they are categorised within the larger MSME cohort despite having very different needs and challenges. While many studies have examined MSMEs, they have not categorically analysed nano enterprises over a sustained period of time to track the changes that occur in business performance from loan
disbursement to closure. This has further widened the demand-supply gap which has left the nano cohort in an impasse.
Empowering nano entrepreneurs in three steps
To effectively address this significant demand for credit, there’s an opportunity to better identify, enable, and sustain the nano entrepreneur.
The first step is to identify and recognise nano enterprises as a differentiated segment within micro-enterprises and to track data on their market linkages and access to credit. Despite being one of the largest cohorts within the MSME segment, it is also the most understudied. Longitudinal research on the impact of financing and asset quality in this sector would go a long
the way in changing the perception of traditional financial institutions.
The second step is to create an enabling ecosystem on both the demand and the supply side of credit. On the demand side, supporting increased digitisation will create more data footprints and visibility for this segment. These data sets can help in credit assessment and enable additional loans. On the supply side, creating new underwriting models will enable financial
services firms, including NBFCs, to offer customised products to nano entrepreneurs, including credit lines which can be drawn upon as needed. These underwriting models will be built on the data gathered through digital trails and collected by grassroots organisations and communities.
The last step is to sustain the survival and growth of these nano enterprises. This is where the financial ecosystem needs to collaborate with the government. Nano entrepreneurs who are new to credit or have no credit or business history need to be given additional risk capital and guarantees to unlock business credit. Structured arrangements such as credit guarantees can mitigate the risk for finance companies, providing incentives for them to unlock credit for the segment in a risk-appropriate manner. Such guarantees have the added benefit of an enhanced credit rating, better cash flow management and reduced cost of capital for NBFCs focused on MSME credit expansion.
The Government of India has already taken major steps in this direction. The government’s 2023 budget has provisioned for a credit guarantee program of Rs 9,000 crore that has the potential to unlock Rs 2 lakh crore worth of loans for the MSME sector. We will be able to go a long way in meeting the credit needs of nano-enterprises if some of this is allocated toward the
segment and guarantees can be structured to incentivise simple registrations (such as Udyam), direct bank linkages for customers, reduced interest costs, and the ability to consolidate the credit needs of a nano entrepreneur, rather than having them spread over multiple NBFCs.
The structure of an economy is only as strong as its grassroots businesses. There are millions like Lukman with big ambitions and untapped potential. It’s time to put a spotlight on this segment – and the opportunity that the nano entrepreneurs represent for the country.
