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During the peak of the 2020-21 COVID period, SAMHITA, a social enterprise, conducted a unique experiment. About INR 6.8 million was distributed among 18,000 nano entrepreneurs (street vendors, beauticians, farmers, artisans) up to INR 40,000 as returnable grants. These were individuals whose business was deeply affected by COVID, and the money was given to revive the business. These were grants that had a repayment date, but it was made clear that payments should be made when possible. To the ultimate surprise of the project, the repayment rate was 97 percent.
A nano entrepreneur?
Micro, Small and Medium Enterprises (MSMEs) contribute 28 percent of GDP and 48 percent of India’s exports. There are 63 million MSMEs providing 110 million jobs. But much that is said and written about this sector is the creamy layer of 13 percent of the largest registered, 8 million companies employing 46 million people. Below that are another 55 million unregistered businesses employing 64 million people (only 31 million are employed in the corporate sector) about which very little is known. These are nano entrepreneurs.
So who are these nano entrepreneurs? These are our carpenters, plumbers, vendors, tailors, beauticians, artisans, agricultural traders, restaurants and so on. But they remain invisible to our economy. Banks/NBFCs to generally not lend to them. Digitization does not touch them. The supply chain connects them at the highest cost. They have limited market access and no insurance. Skills training may not reach them. They don’t keep books of accounts, don’t have entity registration and probably don’t have collateral. They remain stuck at subsistence levels serving society and a long way from poverty. A typical income is around INR 25,000 per month.
If 5 percent of nano-enterprises employ one person each year, that creates 2.5 million jobs annually, which takes care of 25 percent of new entrants to the labor market. The challenge is to make it happen.
The biggest obstacle is the lack of commercial credit. The challenge for lenders is to assess the risks. Absence of financial data, written contracts, adequate traces of bank accounts, lack of VAT and IT returns throw off the conventional credit assessment. However, the SAMHITA experiments show that thoughtfully designed lending programs can reduce risks. Can we build a risk model on the 4C loan, i.e. character, capacity, collateral and connectivity, mostly based on surrogates? This happens in truck finance every day. More than half of truck buyers are nano-entrepreneurs (truck drivers become owners) who use credit for the first time. Therefore, building a credit score based on surrogates should be extremely possible for nano-entrepreneurs from other cohorts as well.
Lending to nano-enterprises would qualify for priority sector lending. Therefore, banks and NBFCs would have significant appetite for this sector. However, loans to priority sectors would not be sustainable above the 2 percent loss norm. Initial default rates in this sector may be in the double digits. This is where philanthropic capital comes in as a guarantee against the lack of first loss. If the expected default rate is, say, 20 percent, each dollar of philanthropic capital can guarantee $5 in loans, achieving a 5X performance. Commercial capital can then provide the necessary funds and realize sustainable returns. As credit scoring is seasoned with actual lending data and the predictability of defaults improves, the need for a first loss guarantee would decrease.
Credit alone will not be adequate for the development of nano-enterprises. These entrepreneurs are hungry for digitization. Digital transactions in billing and payment would create an audit trail that builds a company’s creditworthiness. Supply chain connectivity is weak. Nano-entrepreneurs often pay the highest costs and have the lowest sales price realization and thus operate with small margins. Linking markets would improve margins and enable business sustainability. Very often, nano-entrepreneurs have only had informal skills training. Access to organized skills upgrading would significantly improve business competitiveness.
There is a fascinating opportunity that the world of nano-enterprises presents to our generation. Can we identify that 5 percent of this universe, bringing together philanthropic and commercial capital, banks and NBFCs, risk analytics and rating agencies and NGOs and putting the deserving 2.5 million nano-entrepreneurs on an irreversible growth path? The impact on the country will be enormous. Are there social enterprises ready to take on this challenge and impact this last frontier of our economy?