Kuldip Maity

The need to have a thriving range of large corporations on a national scale notwithstanding, it has been proven over time that the presence of a wide array of micro, small and medium-scale enterprises (MSMEs) is an important growth driver. It is also a fact that the need to provide financial assistance and business development services to MSMEs is essential to ensure sustainable and consistent economic growth. It is no secret that the need of the hour is to show greater financial commitment towards such enterprises, thereby pushing the growth engine as well as generate employment at a local level.

A major roadblock for the development of MSMEs has been a lack of access to, or lack of, credit. While MFIs have come forward to do the needful, an important aspect in identifying MSMEs to back is to analyze and understand their financial needs. Since MSMEs differ in scale of operations, as well as in products and services they deal with, the need is to finance them in a customized manner. This requires to be determined by factors like whether a particular MSME is in a start-up phase or an existing one looking at expansion. So, MFIs looking at providing loans to MSMEs need to identify whether they would like to support existing entrepreneurs or back potential entrepreneurs with growth prospects.

Raising working capital is the primary obstacle for existing MSMEs, and most such entrepreneurs often end up borrowing from informal lenders at much higher rates of interest.

Since MFIs deal with a higher level of risk compared with that of formal banks, a careful analysis of an MSME’s portfolio carries the promise of good repayment. While dealing with MSMEs, microfinance institutions generally provide the dual services of financial intermediation and enterprise development. Financial intermediation involves providing funds to MSMEs in the form of business loans. These loans can be utilized for further investment in the existing business or for setting up smaller business ventures.

MFIs also provide enterprise development services along with the knowhow to raise human capacity and organizational abilities. Besides, they also provide guidance about access to markets, skills development, training in marketing and use of technology so that their customers can use their resources more productively.

Given that MSMEs need to play a major role in adding to the nation’s wealth through sustainable growth, it is imperative for more and more MFIs to join the development juggernaut, to push the growth engine in a more efficient manner.

Home is where the heart is, goes the oft-quoted English proverb and this adage is probably at its truest in India’s villages. At a time, when the government is putting stress on promoting health and hygiene, often the first step towards uplifting the rural populace is to inspire them in working towards having a better home, with proper sanitation facilities.

Given that most MFI customers operate from their homes, it is important to remember that staying in a better home is a key to improving entrepreneurial skills. The presence, or lack, of a pucca house, with proper toilet facilities, could have significant impact on productivity. This goes on to say that if MFIs venture into the segment of providing loans for affordable housing, it would have a direct impact on the core agenda of entrepreneurship of micro enterprises.

Microfinance has proven over the years that its presence acts as an effective mechanism to disseminate crucial information on health, sanitation and other living standards, which are important concerns for people in villages. Microfinance has had positive impact on the living standards of such people, helping them not just to cross the poverty line, but also to empower themselves. Notes from the field recognise that microloans provide the right environment and opportunities for people to improve their standard of living.

While it is not a secret that rising income is among the key factors in aiding development, introduction of housing loans by MFIs will be instrumental in bringing about both economic and social changes.

In simple terms, when MFI borrowers, who mostly run their enterprises from home, the entrepreneur is more likely to succeed, if living in a better home. While a healthy and happy person will always have better productivity, one operating the business from inside a rundown and unhealthy room, with hardly any natural light or ventilation, will have reduced chances of scaling up.

Microfinance is no more just a tool to eradicate poverty; it has become a crucial catalyst for individual development and growth in entrepreneurial activities in economically under-served areas of the country. All reports on microfinance succinctly suggest that over the last few years MFIs have helped change not just people’s lives but also infused fresh blood into rural communities, and created a sustainable financial eco-system.

Microfinance’s agenda of bringing to light the often neglected and oppressed poor people from villages no more seems a horizon that cannot be touched. Under such circumstances, it is time for MFIs to extend the scope of their operations to stand by small and medium enterprises, an area that has not been paid much attention.

Even though financial inclusion is at the top of the agenda there is still no roadmap as such to provide loans to those who have outgrown amounts above the upper threshold of MFI loans but are still not big enough to avail SME loans from commercial banks. The needs of these enterprises have till date remained unmet by both MFIs and commercial banks. Since such enterprises have the potential to act as major source of employment in villages, besides being significant drivers for economic growth in rural areas, access to financial services for such borrowers could help further a notch the government’s key policy objective.

In India, MFIs are allowed to lend up to 15 percent of their net assets in non-microfinance loans, some MFIs like VFS are working towards providing larger loans to select borrowers, whose businesses show the potential for scaling up. While the government launched the Micro Units Development and Refinance Agency Bank (MUDRA), a public sector financial institution, in April 2015 in a bid to cater to such borrowers, the road is still long and windy. Since all large MFIs report to credit bureaus, it is not hard to prevent multiple lending, in the process helping first-time borrowers to build credit histories.

Although there are still some doubts given that such loans are new, there is a need for studies on lending models and variations in lending patterns by different regions of the country. However, SMEs across the globe have shown promise as strong role-players in national development, primarily owing to the volume of employment they generate. There remains no doubt that catering to financial needs of SME borrowers has considerable potential to stimulate local economies in a more inclusive and dynamic manner.