‘Access To Formal Finance Best For Nano-Entrepreneurs To Grow Business': Expert On India's Micro Enterprises 

Nano-entrepreneurs, also known as micro-entrepreneurs, play a crucial role in the Indian economy as they drive innovation, create jobs and contribute to local development.  These small-scale entrepreneurs operate micro-enterprises that cater to specific niches and serve local communities. After all, what would we do without the local kirana shops!

These nano-entrepreneurs sit under the larger definition of MSME or micro, small and medium enterprises in India who contribute to roughly 30% of India's GDP growth, according to the estimates.

A study by Chennai-based Krea University's IFMR business school found that  if these nano enterprises–defined as small businesses like retail or kirana shops, micro wholesalers, and even street vendors with an annual turnover of between Rs 10 lakh and Rs 1 crore–get loans, they would be able to grow their businesses. And the more credit they get, the more they can grow their businesses.

The majority of the nano entrepreneurs in India are women between the ages of 20 and 50 and have mostly been educated up to the 12th standard. The sample is small but well represented, and the experts are confident that the potential for credit-led growth, trickle-down growth, and hence economic expansion in this sector is pretty high.

To get a better sense, Govindraj Ethiraj, editor of The Core, spoke to the author of the study by IFMR-Krea, Sharon Buteau. She is the executive director at LEAD at IFMR University. "Not every industry is bound to grow. If you have a Kirana store, you may want to open a few in the local neighbourhoods or if you are some type of manufacturer in a supply chain you might have the ability to expand if you have the appetite, the understanding, and the knowledge," Buteau said.

Here are some edited excerpts of the interview with Sharon Buteau:

What do the terms nano enterprises or nano entrepreneurs mean?

This is an interesting study conducted with the Dell Foundation and the key was to understand the impact of finance and the allied aspects of nano-entrepreneurs.

Nano entrepreneurs are part of the overall MSME spectrum, and they form the bulk of micro-enterprises. Most of them are typically the small kirana shops, small retail shops, or even street vendors-basically people in your neighbourhood. They could be hyper-local and have an important function in the economy. Often they could also be part of the wider supply chain. Most of them are under Rs 1 crore.

They are likely to be related to family business headed by the male or female–wife or the husband– who helps a lot and the family is involved. Many of them are not very well educated but try to find ways for gainful livelihoods. They are important in Tier 2 and Tier 3 cities, which form the bulk of how people earn their livelihoods in those domains.

You are also saying that when we lend and give them more working capital and loans, it helps them grow apart from just sustaining themselves. Growth is an important aspect. Is that borne out through the data that you have looked at?

When you see the evolution, this sector is heterogeneous--even within the micro or the nano entrepreneurs, they can go anywhere from a Rs 3 lakh turnover to Rs 1 crore. So you can imagine the spectrum. Most start with the small funding they receive from friends and families. However, as they grow bigger they need money for inventory and other aspects. And as they understand their markets, they are keen to develop.

They are hyper-local and understand the needs of the mass. Some of them are also savvy and more entrepreneurial and can understand how to fit into the bigger supply chain. For that, they need to have access to quick and affordable finance. When you see some of the sources, a lot of them could be local pawn brokers, money lenders, and various forms of chit funds–registered or unregistered-that they usually approach to grow.

But I think the best for them would be (able to) access to formal finance, either through NBFCs, emerging fintech which is also a form of NBFCs, and also formal banks that offer favourable terms to enable them to get bigger loans at better prices.

Not every industry is bound to grow. If you have a kirana store, you may want to open a few in the local neighbourhoods or if you are some type of manufacturer in a supply chain you might have the ability to expand if you have the appetite, the understanding, and the knowledge. So one aspect is to identify who can grow, what can grow, and identify how well one can assess creditworthiness which is one of the problems in understanding how to bring lending to this domain.

There is a lot of innovation-digital is one of them. We are able to reach out and understand digital trails–what are the transactions, how big is the business, and what other forms can you assess them if they do not have assets or other forms of collaterals? So they are not like the usual, as in banks, where you can clearly understand your assets, etc. So that is the challenge of lending.

However, the opportunity is huge because a lot of these nano enterprises are actually credit-worthy. The repayment rates of most of them are favourable. We need to look at them from a different lens, given their specific characteristics, and understand their growth potential.

Are NBFCs mostly lending to them today?

A bulk of NBFCs lend. There are also the banks that try to form specific units– MSMEs hubs, etc but to reach out to this market you need to have a lot of agents on the ground, the ability to understand the market and NBFCs seem to be more ideal to do that. Even the recent fintechs who have been successful in understanding that market has digital models where they enable people digitally but also have their feet on the ground to be able to understand and tap these markets.

You are saying-implicitly-the cost of client acquisition or cost of servicing these nano entrepreneurs is somewhere absorbed by the digital physical model.

It enables. The huge cost is trying to assess the creditworthiness of these clients and serving them. Although our study has focused on different channels, we have looked at different partners too-digital, on the ground, NBFCs, etc.

Was this a pan India study or did you focus on parts of India?

We tried to make it as pan-India as possible. We randomly selected from a portfolio of some partners that work with MSDF (Michael & Susan Dell Foundation). By large, I would not say that it is an empirical sample if you do a survey with the government, but I would say that  it has a lot of indications and talks in a lot of depth about some of the trends in nano enterprises–we did compare it with other data being collected. One thing about this particular segment is that there is no real longitudinal survey done to adequately understand. You have the annual survey of industries that look at the bigger formal one and then you have the NSSO data that looks at forms of self-employment and nano enterprise. So you often have to collect different data sets to understand this segment.

I am assuming that this segment is financially included. They have a bank account and are transacting using those bank account and not just using them for loans but also for commercial transaction

Financial inclusion is interesting because you can be included but not super integrated.I am actually studying that phenomenon. What is the spectrum of being included?

So, you can be included if you have a bank account, if that is the definition. You can be included if you have savings or a loan. Now, we are starting to look at financial well-being. Once you are in the system, I think it is one of India's success stories that even the gender gap in terms of opening bank accounts between men and women has closed. So, I would say that they are somewhat financially included but they are not optimising their financial well-being within the finance system. There can be much more that can be done in this segment to make sure that they are fully formalised, for example. Or they are utilising concepts such as micro-equity, a lot of people want to invest in these countries and they do not know how well to integrate.