By Utpal Isser Credit and Finance for MSMEs: Rural India is home to over 3.5 crore micro-enterprises. These are farm entrepreneurs, micro-enterprises such as shop-keepers selling grocery and consumer goods etc, service providers such as repair services of vehicles, electronics and electrical goods and agricultural equipment, small manufacturers such as RO plant, small agricultural equipment etc. These micro-enterprises play a pivotal role in a country’s overall economic development in terms of growth, lifestyle improvements, employment generation and convenience. In addition to that, data and smart devices have reached the nooks and corners of rural India resulting in a significant increase in openness to digital experiences and solutions in comparison to where we were less than a decade ago. While the entrepreneurship landscape at large is increasingly becoming aware of their significance and potential in urban & metro towns, rural micro-enterprises are still unable to integrate seamlessly with finance, distribution and mechanization services, all critical conditions for helping this transient sector to jump to the next orbit of achieving competitiveness and production on scale. Despite the ongoing policy focus, the ease of access to finance and lack of technical know-how has been the biggest hindrance to the growth of this sector. At an overall level, our country’s traditional banking system facilitating access to credit, necessary for supporting the ancillary services, is still small relative to the existing requirements. Against this backdrop, micro-enterprises find it challenging to access adequate credit and leverage to tech for ease of business, both being instrumental to ushering in unprecedented growth for the sector. The current state of things: The potential for availing credit facilities and the demand for credit In 2020, our country had over 749 million internet users across the country. However, a large fraction of 1.3 billion people are still unable to access basic banking services. Moreover, the Global Findex data showed how 5 per cent of Indians accessed a financial institution account from their phone or the Internet, and only 2 per cent of the population owned a mobile money account. This basically tells us that the infrastructure for tech-based rural financing exists, but the threshold for facilitating technology adoption has to be crossed. Rural-centric fintech startups can effectively facilitate this transformation. In terms of demand for finance, the total demand for external credit is estimated to be Rs 37 trillion while the overall supply of finance from formal sources is estimated to be Rs 14.5 trillion Therefore, the overall credit gap for the larger MSME sector is estimated to be Rs 20 – 25 trillion, as per the Reserve Bank of India. Barriers to growth are barriers to financial inclusion In credit markets, adverse selection and moral hazards are exacerbated in the case of micro-enterprises that are without any loan history or collateral to secure a loan. Micro-enterprises also typically suffer from higher loan rejection rates than the rest due to their higher risk profile. It is safe to say that this financing gap affecting micro-enterprises is essentially a growth capital gap. Assessing the creditworthiness of micro-enterprises is another pain point due to information asymmetry. Most rural enterprises struggle with lack of standardised banking data, cashflow details etc required during credit assessment. The regulatory loopholes often cause perennial problems for micro-enterprises, as it hinders financial access even though the government has implemented measures to make credit access for micro-enterprises available. When it comes to lender coverage, there is very poor credit depth in large parts of the rural countryside. Lastly, the traditional credit availing systems result in a high turnaround time, which tends to hamper the business processes of the micro-enterprises. Subscribe to Financial Express SME newsletter now: Your weekly dose of news, views, and updates from the world of micro, small, and medium enterprises How Technology navigates challenges In order to meet day to day operations and acquire productive assets, micro-enterprises require working capital and term loans. Take, for instance, an onion farmer from Maharashtra employing labour for manual seeding and transplanting. Now tech-driven access to farm mechanization, finance and distribution can potentially bring down the cultivation costs by two-three times, improve productivity and reduce the dependence on manual labour. Household centric, a novel approach to lending basically entails treating the entire rural household as the borrower instead of an individual. In the case of the onion farmer, the entire family’s earnings can be treated as the working capital, which in turn will positively impact the assessment of the repayment capability of the borrower. Fintech startups working in rural areas can make use of surrogates like size & quality of assets (house/land/Agricultural equipment/Number of milch animals), bank statements, GST data, and standardized scorecards to evaluate the creditworthiness of micro-enterprises. Uniformity in and simplification of various loan application formats and assessment processes in line with learnings from supply chain financing and escrowing of cash flows is needed for quicker decision making and reducing turnaround time. Moving on, in the absence of collateral, underwriting the borrower often entails a high-tech, high-touch model, a significant innovation in how small business loans are evaluated, underwritten, and managed. Rural lending startups with an emphasis on leveraging technology platforms can effectively complete loan applications from sourcing to disbursement in less than 7 days using algorithms to analyse data points from various sources such as GST data, IT returns, Bank Statements, etc. Electronic KYC, paperless (digital) applications, rapid loan underwriting and a greater emphasis on customer service can redefine lending to the micro-enterprises. AI-driven solutions to convert manual processes into intelligent and interactive chat and voice-based BOT solutions will not only improve the efficiency of ground teams but also offer an enhanced digital experience to the customers. The lack of rural enterprise data can be addressed by collecting and verifying all non-standardized details physically and digitising them before credit algorithms are applied. It Increases the TAT but enables timely credit access. Above combined with financial literacy campaigns and focus on financial education, especially for women and kids and making available technical know-how on how to improve yields in agriculture through apps and call centres run in vernacular languages can help transform these rural enterprises into a large growing segment which would help in the growth of the national economy due to the sheer size of this segment. Bottom line, a customized tech-led solution for unlocking the growth potential of micro-enterprises is the need of the hour. One that instils trust in the system by acting as a last-mile partner, includes touchpoints for the rural customers by maintaining physical as well as the digital presence and purposefully addresses the growth-centric nuances of micro-enterprises in rural India. Utpal Isser is Co-Founder of SarvaGram. Views expressed are the author’s own.