India’s social fabric has undergone a series of transformations since Independence. After the liberalisation of the economy in the 1990s, the market opened up and employment opportunities grew, as did the spending power and standard of living of the average Indian.
As financial access grew, so did social mobility. However, certain sections have lagged behind due to myriad reasons ranging from social barriers to a lack of access to education and financing.
One of these sections is made up of a multitude of micro, small and medium enterprises (MSMEs), which form the foundation of the economy.
Contribution to GDP
At present, the sector comprises over 63 million MSMEs and accounts for close to 30 per cent of the country’s GDP, 50 per cent of India’s exports, and employs over 120 million people. With this vast reach and potential, the sector undoubtedly has a very significant impact on the country’s social fabric. Let’s explore how Indian MSMEs shape the nation’s progress, and the hurdles that hinder them.
Credit gap hurdle
Although MSMEs form one of the pillars of the Indian economy, a vast majority of them are still in the informal sector.
Without formalisation, not only is it difficult to track the metrics of income and employment for these businesses, they also slip through the cracks of government welfare schemes and subsidies.
The sector also suffers from a vast credit gap, estimated by the World Bank at over $400 billion. This gap severely impedes small businesses, and access to formal credit can greatly increase the ability of these businesses to live up to their potential for growth, increased income and employment generation and support local economies.
These small businesses are not only instrumental in supporting the entrepreneurs themselves, but also help them to become job creators as well as boost local economies.
These businesses, therefore, have a huge impact on the socio-economic position of the country’s population and its progress.
Fintech solution
The ‘missing middle’ problem of MSME financing can be largely attributed to two main factors: the risk aversion of traditional lenders like banks, accessibility issues related to documentation, linguistic barriers, and a lack of proper support systems for last-mile borrowers. NBFCs are the new-age solution to these issues, especially the ones that have adopted the fintech model.
They often specialise in catering to niche customer segments that traditional lenders steer clear of. Many of them have adopted a more tech-enabled approach to gauging the creditworthiness of MSME borrowers by assessing factors like business potential and order pipeline.
The tech transformation that has been unfolding across the nation over the past several years is also aiding the efforts of NBFCs to reach underserved markets and drive sustainable impact for MSMEs. Empowering small business entrepreneurs to expand, improve and sustain their businesses, directly translates into social mobility for these individuals and their families. It also triggers positive changes for the community at large.
Women at the helm
Women entrepreneurs are disproportionately disadvantaged by social stigma and gender-based discrimination when it comes to accessing capital and getting their businesses off the ground. However, when they do succeed, they have the potential to effect generational change. They can inspire young women to become financially independent and open doors for other women to enter the workforce.
They are also largely responsible for improving the baseline of the standard of living for their own families. According to various studies, when women earn, they spend a large chunk of their income improving their family’s lifestyle. A 2022 survey by LXME, a financial platform for women, showed that the top 3 categories where Indian women spend most are groceries, children’s education fees and personal shopping.
Together, these factors facilitate social mobility and economic affluence, resulting in a better educated, more health-conscious, and socially aware population on the whole.
Access to capital for MSME entrepreneurs has the potential to alter India’s social fabric. This change can be brought about by providing accessible digital solutions, as well as the opportunity for them to receive personalised customer service, which fintech NBFCs are perfectly positioned to facilitate.
Women MSME entrepreneurs are important in driving sustainable socio-economic development and improving the standard of living of families and communities. Supporting them with access to formal capital and easing the process for them to obtain is, therefore, crucial to making a real difference in the lives of millions of Indians.
The writer is the Founder & CEO of Kinara Capital