By Preethi Rao
Credit and financing for MSMEs: According to a study by the International Finance Corporation (IFC), women-owned businesses in India face a financing gap of around 70%, and much of this gap can be attributed to social biases rooted in the financial system. Women are often overrepresented in traditional sectors such as garment making and typically run businesses from home, resulting in low incomes and low growth potential.
Data from the 73rd round of the NSS shows that while male and female entrepreneurs in all income groups access loans in similar proportions, the amount of loans obtained is significantly lower among female entrepreneurs (more than 50% lower than the amounts obtained). loans that their male counterparts have access to).
On the supply side, women entrepreneurs lack appropriate products that meet their needs, and procedural requirements such as the need for collateral and credit ratings can limit access to finance. On the demand side, inadequate accounting and financial management skills, low credit score and low financial literacy, among other reasons, can keep women away from accessing formal financial services.
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For women-led micro-enterprises, the Pradhan Mantri Mudra yojana (PMMY) has been one of the important programs aimed at facilitating women’s access to institutional credit. However, female borrowers accounted for only 41% of total sanctioned loans in 2018-2019 and this was within the shishi category, that is to say a loan amount of around Rs 50,000. These figures indicate the low amount of loans to which women have access.
Additionally, most women entrepreneurs usually depend on their own savings, loans from family and friends or micro-loans to finance their business needs. 6e Indian Economic Census data indicates that the source of funding for 79% of women-led businesses is their own capital, as banks and other financial institutions are still unsure of their business models and potential or guaranteed returns on loans .
The Value for Women report points out that the nature of the business banks do, where lending criteria and customer acquisition processes may not take into account the unique needs of women, leads to the exclusion of many female entrepreneurs. This, coupled with entrenched social norms that dictate that most family property titles are in the names of men rather than women in the family, prevents women entrepreneurs from being able to use them as collateral.
Moreover, these challenges manifest themselves in different ways. For example, a higher interest rate is charged to female entrepreneurs for loans once they are approved. Even when all other observable criteria are the same, women entrepreneurs are 30% more likely to need a guarantor. Additionally, male-led businesses typically raise more formal and informal venture capital than female-led businesses. For women entrepreneurs, microfinance loans and loans through collectives or self-help groups have been the most common way to access financial support.
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There are many ways for financial institutions to adopt inclusive practices while reaching out to women entrepreneurs. For example, alternative credit reporting options can replace the collateral requirement, allowing women to access formal credit and/or better credit terms. These can take the form of using transaction history from digital platforms or compiling a score based on cash flow analysis, household income and behavioral data. As investing with a gender lens gains momentum, the implicit investment bias can be addressed using a two-pronged approach – making investors more sensitive to the gender aspects of barriers to accessing finance and build the capacity of women entrepreneurs to pitch their business ideas and financing needs. .
A diversity of financial products (term loans, working capital, etc.) are needed to meet the needs of women-led businesses at different stages and for various needs. In addition, the credit terms must be adapted to their repayment capacity (eg daily repayment, “baggage loans”, etc.). Blended finance mechanisms can help provide access to finance at subsidized interest rates. Some suggestive solutions include – donors/philanthropic organizations providing a first-loss default guarantee, a combination of seed capital with debt at a lower interest rate, and a “missing installment” guarantee (such as the moratorium extended for pandemic) to deal with natural calamities or other such emergencies.
In conclusion, through innovative approaches and greater institutional support, there is potential to significantly reduce the persistent credit gap in the female entrepreneurship segment in India.
Preethi Rao is Associate Director at LEAD Research Center at Krea University.