For decades, micro-businesses have dominated India’s business landscape, resulting in fragmented distribution networks, localized supply chains, and the absence of organic growth or scalability. Women own 20 percent of approx. 63 million micro and small businesses in the country, largely operating within the lower spectrum of enterprise sizes with annual turnovers ranging from INR 1 to 50 million.

MSME revitalization needs serious, systematic and sustained infusion of capital, besides access to skilling and markets. But, if Institutional finance has struggled with the MSME sector as a whole, its treatment of women micro-entrepreneurs has been particularly short. Women micro-entrepreneurs are typically offered unfavourable terms of credit and face rejection rates 2X of male counterparts. In fact, the gender gap in MSME credit currently stands at USD 11.4 Billion,  and women-led MSME’s face a cumulative finance gap of USD 158 Billion. 

Enter, DPIs

India’s digital public infrastructures are enabling MSMEs to formalize through digitization. This encapsulates enterprise registration (Udyam), business cash-flows (TReDS), market linkage (ONDC) and credit enablement (OCEN). Integrated, this technology ecosystem enables enterprise data generation and third-party utilization of enterprise-data through aggregation and consent  (AA framework), thereby opening a multitude of data-led underwriting and digital lending opportunities in the MSME space. Per available estimates, the size of this opportunity lies between $80- $100 Billion and fintechs are actively reaching for it.

The fintech boost to MSME Lending

With increasing adoption of digital payments and growing use of the public tech stack by micro-businesses, suppliers and distributors in the MSME ecosystem, fintechs are building the digital credit layer fairly intuitively- embedding tailored credit options at and using digital cash flow and transaction points. This has translated to dynamic transaction-based models of supply chain financing, invoice-based lending, POS/QR-based finance, and a growing cache of LaaS (Lending-as-a-Service) offerings to banks and NBFCs. This market is growing, gaining traction and continued investor support.  

However, despite this dynamism, fintechs are yet to effectively address the unique pain-points of a critical customer segment in the MSME space – women micro-entrepreneurs. 

A missing chapter – Women in the MSME lending story

Majority of women-led MSMEs are established out of necessity rather than opportunity, predominantly in rural and home-based settings. This situational factor restrictively impacts their access to crucial resources such as time, capacity-building opportunities, and information networks, which are essential for growth-oriented business strategies.

Capital access remains an overarching challenge. Due to their survivalist nature, these enterprises tend to be smaller and require smaller, more frequent capital infusions, which consequently increases the cost of loan servicing. Additionally, women (legally) own fewer economic assets on average, complicating loan assessments and financial credibility in the eyes of potential creditors. Women are also significantly under-networked in male-dominated trade credit and referral networks. This lack of networking undermines their ability to negotiate favorable terms, further limiting their access to formal credit channels on an equal footing with their male counterparts.

Building for women takes nuance and intelligence

Going digital and pinkification of UI is not going to automatically fix the gender-gap in MSME credit. Men and women inhabit different financial and digital ecosystems. For instance, while men may find it convenient to access supply chain finance being well integrated with supplier networks, women are more likely to discover credit opportunities through SHGs and women-led cooperatives. 

Similar differences apply to digital adoption as well.  Men own personal smartphones and have greater comfort and confidence in digital payment environments. Women on the other hand rarely own personal smartphones (especially in last mile segments); and are known to function with strong mental accounting and money management skills that find no resonance in existing digital environments.  

Therefore, fixing the gender gap in MSME credit will take a lot more nuanced thinking than digitization of transactions and business records.  Here are some ideas on what fintechs can do to intentionally enable credit access to women micro-entrepreneurs –

1. Build mechanics to graduate women micro-entrepreneurs across the lending pyramid –  Women-led nano- and micro-enterprises are largely either self-financed, financed with informal credit or derive working capital from MFI group loans. The latter is useful to bridge routine liquidity gaps. However, research demonstrates that micro loans make no contribution to business growth or scaling. Fintechs can develop mechanisms to build data portfolios of women entrepreneurs in current JLG/SHG pools, and generate granular data profiles to graduate them to higher-ticket individual business and working capital loans. One way to do this could be to track their repayment discipline and financial behaviour over an MFI loan app over 2-3 micro-loan cycles. 

2. Invest and create the next generation of growth-oriented women micro-entrepreneurs –  Often restricted to domestic spheres, with few sources of information and learning beyond immediate family and peers, women micro-entrepreneurs lack access to entrepreneurial mentorship and education. Fintechs can explore alternative ways to build entrepreneurial discipline and acumen in the target segment. Develop and distribute freemium ‘entrepreneur’s toolbox’ modules using phygital channels. Design your modules and handholding interaction points intentionally for women- imbibed with native financial concepts, intrinsic goals and aspirations, lived imagery and built-in learning curves and reward systems. For instance, partner with an MFI-NBFC and co-create a book-keeping app for women running businesses in their customer pool. Create phygital and online forums for peer learning, market intelligence, advice and problem-solving.  Remember this is a long game. You are building entrepreneurial orientation and capability at the tail-end of the market to enable women-led nano-/micro-businesses reach enterprise-size and formalization thresholds that unlock access to institutional credit. 

3. Build strategic partnerships –  Study and profile the target segment. What value chains are they part of? Build embedded finance up and down value chains with high degrees of women’s participation. Looking into the silver jewellery crafts value-chain in Orissa? Partner with e-commerce platforms and white-label retailers. Link home-based workers to e-marketplaces. Partner with an NBFC or Bank to embed transaction-data linked artisanal credit on tap.  Again, think intentionally and contextually. Access to technology is a tremendous pain-point for female micro-entrepreneurs. Access to technology needs exposure, bold decision-making and lumpsum capital investment that do not work in favour of the typical socio-economic profile of female micro-entrepreneurs. Address this. Build targeted technology diffusion models with embedded capital finance. Partner with rural-tech startups and build tech platforms to link end customers to lenders and tech providers.

4. Finally, find ways to experiment- All said and done, female-led nano- and micro-businesses remain a high-risk lending use case, not because there is a lack of talent or enterprise, but because it will take the industry more time to accurately profile the segment. Until that happens, fintech enablers and digital lenders can find means to lend to the segment while also derisking their own books to a reasonable extent. Direct lending fintechs can consider blended finance partnerships to pilot experiments. Not only will this address the current gender gap in MSME credit, but also foster a positive lending culture and borrower discipline; and it may weed out bad apples! 

Way ahead

Female micro-entrepreneurs In India lack an ecosystem of resources to build and navigate their entrepreneurial journey. Enterprise credit is the immediate way forward.  This is a big opportunity for fintechs to innovate and be market-makers in a segment where incumbent banks and NBFCs do not have the tools to benchmark and service at market rates. 

Technologies are falling in place, It’s time to establish intention. 

(A version of this article appeared in financialexpress.com on Feb 25, 2024)