Finance Gap Affecting Growth of Women-Owned Enterprises: IFC study

 

Financial inclusion is considered to be instrumental in empowering women as advancing credit to women, who own businesses, improves their economic stature and independence across the globe. In the Indian context, encouraging greater access to financial services becomes more relevant given the various degrees of socio-economic discrimination  women are subjected to in their daily lives. The following article discusses the findings of a report titled ‘Micro, Small, and Medium Enterprise Finance: Improving Access to Finance for Women-owned Businesses in India’ (Report) published on March 11, 2014 by the International Finance Corporation. The research report focuses on the opportunities, challenges, and way forward to improving access to finance for women-owned businesses in India.

In India, there are around 3.01 million women-owned businesses which account for about 10 percent of the total micro, small and medium enterprises (MSME). They collectively contribute around 3.09 percent of the total industrial output and employ over 8 million people.

As data reveals, 97.2 percent of women-owned businesses fall under the micro industries category. This concentration of industries indicates reduced growth capacities and opportunities these companies caused due to the huge gap in the demand and supply of financial services to the same.

According to the report, the financing gap for women-owned businesses amounts to Rs. 6.37 trillion in 2012. This accounts for 73 per cent of the total requirements by MSMEs in the country.

Currently, the various funding sources for women-owned business include formal, semi-formal and informal sources. Out of these available sources, women-run enterprises, much like the general trend in the MSME sector, largely depend on informal lending sources that constitute 92 per cent of the total share of funds provided in 2012. There are 3 million women entrepreneurs in India, but only 3 per cent have access to finance from formal financial institutions.

Barriers to financial inclusion of women

The major factors that impeded financial inclusion of women entrepreneurs are as follows:

Lack of adequate collateral: Due to persisting social restrictions around inheritance and land ownership, women in India do not have ownership of property or enough assets to use them as collateral for availing loans at low interests from formal funding sources. Even when women do own legal rights to properties, the male members either get them legally transferred to themselves or exercise control over them even without legal rights or title deeds.  Therefore, poor financial literacy amongst women and lack of agency of women in terms of title deeds restricts their capacity to ensure collateral for credit.

Lack of formal loans to women:   As the report mentioned above points out that approximately 90 percent of women-owned enterprises are in the informal sector and 78 percent of them belong to the services sector. Banks traditionally identify the informal and service sectors as high risk group as interest returns remain uncertain. This is mainly because of the following reasons:

a)      lack documents and papers essential for banking services, and

b)      increased number of smaller loans shoots up the cost for the banks to administer and provide equal financial services to all.

Absence of women employees in bank: Women employees, who are believed to act as mediators enabling more women to come up to banks to avail banking services, constitute less than 20 percent of the bank’s workforce.

Apart from the afore mentioned factors, lack of financial awareness, absence of support from the male members of the family and lack of confidence to approach financial institutions act as the major barriers.

Government Response

The MSME ministry launched the government’s only financing scheme for women entrepreneurs- Trade Related Entrepreneurship Assistance and Development (TREAD)-in 2008. This is the only targeted approach on the part of the government to provide finances focusing on the MSMEs. However, as against the target of Rs. 38 million only Rs. 7.7 million were disbursed as loan amount in 2012.

The central schemes like the Prime Minister’s Rozgar Yojana, the Swarna Jayanti Shahari Rozgar Yojana and the Swarna Jayanti Gram Swarozgar Yojana currently provide funds to MSMEs. But the net contribution of these schemes is a mere 7 per cent of the total share of funds supplied to women-owned MSMEs.

Lastly, by establishing more branches of Bharatiya Mahila Banks, the government aims at catering to the banking requirements of women and promote their economic empowerment.

Conclusion

Although microfinance plays a key role in encouraging individual women belonging to the low income group, who require loans to run tiny enterprises, its mono-product environment, singular delivery model, lack of flexibility, and shorter-tenure loans with limited amount of credit restrict their scope to low-income women or micro entrepreneurs rather than women-owned MSMEs.

Considering the gradual rise in the number of women entrepreneurs in India, there is an urgent need to encourage banks to step up formal funding of women entrepreneurs.

Pallavi Ghosh

Right to Entrepreneurship and Aspirations

Photo Source: Linked in

This is in response to Professor Shamika Ravi’s article, “No monkey business” (Indian Express, May 3, 2014), wherein she says that the “general improvements in physical and financial infrastructure have contributed significantly more to the growth of entrepreneurship in India than specific targeted policies of the government”. The Congress Party promised in its 2014 Lok Sabha elections manifesto a “Right to Entrepreneurship that will protect and assist all those who seek to become entrepreneurs”. There seems to be some serious confusion in dealing with the idea of the right to entrepreneurship. The right to entrepreneurship essentially mean the broad term of institutional framework rather than taking one of its sub-sets like the “physical and financial infrastructure” which the writer seems to be taking by underestimating a whole lot of other factors in a “Business Environment” or business eco-system. Moreover, there is a fundamental difference which the writer seems to miss notoriously. The difference is the policy perspectives of distinction between fostering new entrepreneurship opportunities and supporting existing enterprises.

At present, the aspiring Indian entrepreneurs are facing acute challenges related to structural issues such as finance (credit), legal and taxation, operational/functional, infrastructure and technology diffusion. The institutional perspective of a “right” to claim a defined service from a public authority would essentially deal with its totality. In the case of promoting entrepreneurship through a rights based approach, the aspiring entrepreneurs are entitled to demand services dealing namely from starting a business to closing a business by a law which facilitates services within a specified timeframe. In other words, the aspiring entrepreneurs should be guaranteed with a legal right to claim a service from a public authority within a timeframe as immunity.

 According to the World Bank’s Easy of Doing Business Report (2014), in India, to start a business it takes 27 days vis-à-vis 16 days in South Asia and 11 days in OECD countries. In terms of number of procedures, India has 12 procedures as compared to 7 in South Asia and 5 in OECD countries. In case of India, the 12 procedures have to be approved by both Union and State governments. Significant amount of delay in processing of each of the 12 procedures would be possible and are indeed in common practices. There are also considerable costs involved in each of the procedures processing in the government. In India, the cost of per capita income for starting a business is also high at 47.3% as compared to 19.8% in South Asia and 3.6% in OECD countries.

 Further, the World Bank Report (2014) shows the exact number of procedures involved in each stage and how many days takes to complete official process: for starting a new business (12 procedures and takes 27 days), dealing with various construction permits (35 procedures and takes 168 days), getting electricity connection (7 procedures and takes 67 days), registering property (5 procedures and takes 44 days), getting institutional credit (8 procedures), paying taxes (33 times in a year), enforcing contracts (46 procedures and takes 1,420 days), resolving insolvency (minimum 4 years to close a business), etc. All of these are seriously hurting especially the poor aspiring entrepreneurs much more than others because the poor entrepreneurs lack either capital or skill or both. Particularly, getting institutional credit in right time to start a business is really a daunting task for poor entrepreneurs.

 All over the world, the micro, small and medium enterprises are promoted vibrantly by the government interventions by the approach of institutional framework. Therefore, by guaranteeing a legal right to aspiring entrepreneurs in a structured institutional framework would inevitably enable them to demand not only clearing of all the processes and procedures within a timeframe from both Union and State governments but also go beyond and facilitate legal framework to reduce huge costs involved in the starting of a business to closing a business.

 According to Dr.Pronab Sen (2014), “The Economic Censuses demonstrate the huge size and growth of entrepreneurial activity in India... the net increase in the number of non-agricultural establishments in the country is about 8 million every ten years. While admittedly many of these enterprises reflect basic survival strategies, many do not.  The past decade has shown the dynamism that is possible in this sector under the right circumstances and with the proper policies. Many of the leading corporate houses existing today belonged to the SME category at the turn of the century.” The specific targeted policies of the government had its role helping of the once tiny SMEs become big corporate houses now! The UPA’s initiatives like MSMEs Development Act, 2006 has also played a major role.

 In a recent research paper by Bandiera et.al (2012) found that the “very poor can be transformed from labourers into basic entrepreneurs and that this occupational transformation is associated with dramatic improvements in their economic lives, bringing them closer to the middle classes in their communities on measures such as wages and spending.”  Further, the study shows that the “entrepreneurship programme in Bangladesh – the Ultra Poor programme, operated by the Bangladeshi NGO BRAC. The Ultra Poor programme provides asset transfers and skills training to the poorest women in rural communities. The programme aims to move these typically asset-less and unskilled women from low-wage and seasonal jobs to the more secure, self-employment based occupations, which are the choice of middle class women in these communities.”

 The structural reforms in the informal sector are yet to be embarked in a major way to create an enabling environment for even the poorest of the poor in the country. Two-thirds of Indians, nearly 82 crore people are below 35 year of age. The time has come for the idea of right to entrepreneurship in India to really re-look its entire apparatus of the regulatory environment from the perspectives of the rights based approach to unleash the potentials of entrepreneurs of all sections of the society.

 

B.Chandrasekaran