Nano Entrepreneur: Last Frontier
There is a fascinating opportunity that the world of nano-enterprise presents to our generation
During the peak COVID period of 2020-21, a unique experiment was carried out by SAMHITA, a social venture. Around INR 6.8 crore was distributed among 18,000 nano entrepreneurs (street vendors, beauticians, farmers, artisans) in ticket sizes of up to INR 40,000 as returnable grants. These were individuals whose businesses were deeply impacted by COVID, and the money was given to revive the businesses. These were uncollateralized grants that did have a repayment date, but it was made clear that payments should be made, when able. To the utter surprise of the project, the repayment rate was 97 per cent.
Micro, small and medium enterprises (MSMEs) contribute 28 per cent of GDP and 48 per cent of exports for India. There are 63 million MSME that provide 110 million jobs. But much that is spoken and written of this sector is the creamy layer of top 13 per cent registered, 8 million enterprises that employ 46 million people. Below this lies another 55 million unregistered enterprises employing 64 million people (corporate sector employs 31 million only) about whom very little is known. These are the nano entrepreneurs.
So, who are these nano entrepreneurs? They are our carpenters, plumbers, vendors, tailors, beauticians, artisans, agricultural traders, eateries and so on. But they remain invisible to our economy. Banks/NBFC to not generally lend to them. Digitization does not touch them. Supply chain connects them at highest costs. They have limited market access and no insurances. Skill training may not reach them. They do not maintain books of accounts, have no entity registration and possibly no collaterals. They remain stuck at subsistence levels performing yeoman's service to society and within knocking distance of poverty. Typical income is around INR 25,000 per month.
If 5 per cent of the nano-enterprises hire one person every year, that creates 2.5 million jobs annually, which takes care of 25 per cent of new entrants to the job market. The challenge is to make that happen.
Absence of commercial credit is the biggest obstacle. Challenge for lenders is to evaluate the risks. Absence of financials, written contracts, adequate bank account trails, lack of GST and IT returns throws out conventional credit appraisal. And yet the SAMHITA experiments show that thoughtfully designed lending programs can reduce risks. Can we build a risk model on the 4C of credit, i.e. character, capacity, collateral and connectivity, mostly based on surrogates? This happens in truck finance every day. More than half the truck buyers are nano-entrepreneurs (truck drivers becoming owners) availing credit for first time. Hence, building a surrogate-based credit score should be eminently possible for nano-entrepreneurs of other cohorts as well.
Lending to nano-enterprises would qualify for priority sector lending. Hence banks and NBFCs would have significant appetite for this sector. However, priority sector loans would not be viable beyond 2 per cent loss norms. The initial default rates in this sector maybe in double digits. This is where philanthropic capital comes in as first loss deficiency guarantee. If expected default rate is say 20 per cent, every $1 of philanthropic capital can guarantee $5 of loans and therefore achieve 5X impact. Commercial capital can then provide the necessary funding and make viable returns. As the credit scoring gets seasoned with actual lending data, and default predictability improves, the need of first loss guarantee would diminish.
Just credit will not be adequate to grow the nano-enterprise. These entrepreneurs are starved of digitization. Digital transactions in collection and payment would create an audit trail that builds creditworthiness of the enterprise. The supply chain connects are weak. Nano entrepreneurs often pay the highest costs and have lowest sales price realization and thus work on thin margins. Market connects would improve margins and provide sustainability of business. Very often, nano-entrepreneurs have had only informal skill training. Access to organized skill upgradation would significantly enhance business competitiveness.
There is a fascinating opportunity that the world of nano-enterprise presents to our generation. Can we identify that 5 per cent of this universe, bring together philanthropic and commercial capital, banks and NBFCs, risk analytics and rating agencies and NGOs and put the deserving 2.5 million nano-entrepreneurs on an irreversible growth path? The impact to the country will be enormous. Are there social ventures out there that are willing to take up this challenge and impact this last frontier of our economy?