Rebuilding Micro-Enterprises Are Small Finance Banks up to the Challenge?

Micro and Small Enterprises (MSE) are extremely vulnerable to the disruptions created by the pandemic. While the COVID 19 pandemic is affecting societies and econ­omies across the globe at their core, the damage to MSEs is severe owning to their inherent higher fragility and vulnerability. India’s adoption of stringent lockdown measures to curb the health impact of pandemic, wreaked havoc for the micro enterprises which forms 99.5% of MSME sector.

Annual Report of Department of MSME -2018-19 mentions, there are 6.34 crore MSME in the country employing a little over 11 crore individuals indicating less than 2 people employed per MSME on an average. Majority of the MSEs are household firms and usually deploy low level of capital, lack technical and managerial skills, follow family organizational pattern for employment. Most of them are unregistered and fall outside the formal network for accessing any meaningful social or economic entitlements and benefits from government. They have poor access to market –  limited market availability and inability to go beyond localized markets and depend heavily on middlemen.

Before the pandemic as well, MSEs as a segment was braving the challenge of lack of access to formal financial services in general and lack of credit in particular. They rely heavily on informal networks to borrow for business needs. MSEs also exhibited weak technological adoption in business operation leading to high inefficiencies and under-utilization of capacity. With the pandemic and lockdown striking them hard, MSEs were struggling to stay afloat with dwindling cash reserves, zero revenues, recurrent expenses, depleting stock levels and almost non-existent credit support. The fragility of their financial and operational health was more pronounced and exposed, post COVID.

As a stroke of relief, the government has opened up markets and businesses (with caution) and announced a slew of fiscal measures targeted for the MSME sector. The stimulus package of INR 20 Lakh Crores to tackle the economic fallout of COVID-19 and to revive the Indian MSMEs was much timely.

Key component of stimulus package wrt MSMEs included INR 3 Lakh Crores Collateral-free Loans with 4-year tenure and a moratorium period of 12 months for Businesses (including MSMEs). The package was targeted for MSMEs with INR 100 Crore sales or INR 25 Crore outstanding loans to help them pay their operational liabilities, disburse salaries for employees, and buy raw materials to get their businesses back on course. The eligibility criteria for accessing benefits from the above scheme resulted in benefits percolating to only 4.5 million enterprises contributing to less than 7% of the total Indian MSMEs under the older definition. More recently, the Government’s decision of increasing the threshold for qualifying for MSME may deprive the small players of benefits due to crowding out. The disbursement of INR 20,000 Crores in form of Subordinate Debt to functional but non-performing or stressed MSMEs and provision of equity support of INR 2 Lakhs to MSMEs through Promoter Loan by banks clearly targeted the Medium-sized enterprises.

As part of the Government relief measures, support for “business purpose” to MSEs was manifested in two critical schemes  (a) INR 1500 crores for 2% interest subvention on MUDRA Shishu Loans (up to INR 50,000)  to benefit 3 crore individuals (b) INR 5000 crores – Loans for street vendors up to INR 10,000.

While banks and larger financial institutions will be distinctly inclined towards directing credit flow to better rated, safer and perceived low risk entities and enterprises, MSEs will gasp for affordable and timely formal credit.

The differentiated Small Finance Bank category has been created with the objective of promoting financial inclusion by supplying credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations. SFBs therefore will have an important role to play in the supporting the revival of micro and small enterprises. SFB’s presence across hinterlands and ability to underwrite the micro-enterprise segment are two inimitable core-capabilities and competencies which can help them provide the much sought after “credit support” to small enterprises, which typically get left out from the coverage of Microfinance Institutions as well as large banking and financial institutions.

In the meanwhile, the various challenges faced by SFBs like liquidity crunch, weakening capital market and deteriorating asset quality cannot be fully ignored. As they transformed themselves from largely mono-line asset-backed revenue businesses to a diversified asset and liability backed profitable businesses, the SFBs have managed the crisis ensuing demonetization and are now faced with a looming NPA crisis as an impact of the lockdown.  It has probably made them test their resilience by undergoing multiple stress points.

It is important to review some learnings in hindsight on what insular systems SFBs should have built-in for better crisis proofing. Going forward, the SFBs have to protect themselves along with responding to the needs of the last mile ‘inclusion’ clients.  In this context it would be critical to know the “essentials” for the SFBs to bounce back to business and devise innovative ways to rebuild the micro-enterprise sector by unlocking the access to credit. The scope for innovation could possibly vary from deployment of efficient financial instruments and structures to raise funds, smart use of blended finance mechanism to attract impact-focused capital, lean and relevant product structuring for MSEs and investing in partnerships and collaborations for credit underwriting across the value chain.

Join the Inclusive Finance India’s webinar on “Rebuilding Micro-Enterprises: Are SFBs up to the challenge?” to hear perspectives and experiences on these questions and more.  

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IFI Webinar (004)




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Inclusive Finance India Summit

Inclusive Finance India is a global policy platform on financial Inclusion setup with the objective of enabling cross-pollination of best practices and breakthroughs,specifically to influence India’s Financial Inclusion strategy and campaign. Recognizing the need and to support this cause, ACCESS has been organizing “The Inclusive Finance Summit” since 2004. This year the Summit is being held on January 18 - 19, 2021 in New Delhi.

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