Unlocking Credit for Women-Led Micro Businesses

February 14, 2023

By Pallavi Madhok, Director, Advisory Services – South Asia, Women’s World Banking

Micro, Small and Medium Enterprises (MSMEs) are the country’s economic growth engines. Many MSMEs have struggled to sustain themselves in the aftermath of the pandemic and require financial support to overcome the economic downturn. Women-led small businesses – which make up 20 percent of the market – are more vulnerable as women bear the burden of caregiving over and above the burden of business distress. As the Government and other stakeholders are exploring ways to revive small businesses after the impact of COVID-19, it is pertinent that women-owned small businesses not be left behind. It is befitting that giving loans to women makes business sense as they are more loyal customers, run profitable businesses, and pay back on time. However, we estimate that women-led small businesses form only 10 percent of the gross loans portfolio of most Financial Service Providers (FSPs). This is partly because women do not approach formal finance, and if they do, they do not get access to credit due to a lack of collateral and credit histories.

Women-led businesses are essentially micro businesses – too big for micro-finance institutions (with a loan requirement of greater than INR 50,000) and too small for banks (with a loan requirement that is less than INR 10 lakhs). This implies that plenty of genuine demand in this “missing middle” goes unmet. Recognizing this gap in the lending ecosystem, policymakers are exploring strategies that enable more women-led businesses to get access to affordable credit.

At Women’s World Banking’s flagship event in India, “Unmasking Bias, Unlocking Credit for Women,” thought leaders in inclusive finance from across the sector came together to discuss the collaborations that facilitate greater access to credit for women-led businesses in India, sustainably and at scale. Mr. Arup Kumar, Chief General Manager of Small Industries Development Bank of India (SIDBI) mentioned at the event how the institution has launched an assisted registration programme on the Udyam Portal that will help unblock a massive barrier to financing women entrepreneurs – the lack of business registration. Further, Women’s World Banking has found that FSPs can tap into the segment of women micro businesses by unmasking biases that may exist in their lending processes.

How to Unmask Bias and Develop Gender-Intentional Lending Processes

Our research reveals that while lenders across formats do intend to have gender-balanced portfolios, biases in lending, more often than not, creep in unintentionally in their processes. Women’s World Banking has designed a simple scorecard for FSPs* to identify and unmask these biases, thereby enabling more women’s access to credit, and in the process, unlocking market opportunities for themselves.

The Microfinance Industry is an excellent example of successfully designing lending products for women through loans that are small, collateral-free, and leverage group-social capital, in the absence of credit history. Despite the success, Microfinance Institutions (MFIs) struggle to grow similar portfolios of women-led small businesses because they continue to rely on traditional products and processes, which may not be necessarily designed for women. Mr. Jiji Mammen, Executive Director and CEO, Sa-Dhan, rightly pointed out how lending products to businesses and their processes are more cumbersome, requiring extra paperwork and repeated bank visits, and manned mostly by men. There is, thus, the potential for MFIs to examine their process to reduce unintentional biases against women business owners.

Unintentional biases could creep across value chains – marketing that does not welcome women; sales channels that are not designed for women; application forms that ask for information that women may find hard to provide; products that are biased against women; and credit-appraisal processes or algorithms which lack sufficient data on women to make fair decisions.

Mr. Manish Bhatia Technologies, Analytics, and Capabilities at Lendingkart explained how digital players could design gender-intentional processes that could enable them to lend to more thin-file and women customers. He said how LendingKart viewed fairness, wherein once a woman entrepreneur applies for a loan, she is treated fairly across value chains by relying on data. He explained how an algorithm is essentially like a child – it needs to be trained to use data in a gender-neutral manner. Because women customers make business sense, LendingKart is now looking to develop gender-intentional digital marketing, sales, and servicing processes that will help attract and retain more women entrepreneurs. He said that this would require not only a change in processes but also a change in attitude, such as building employee empathy to service women better.

Leveraging Distribution Reach of Banks to Promote Existing Government Loan Schemes

The panel agreed women business owners are often not discovered or serviced by the formal finance sector because either they are too small or don’t have credit histories, making it hard to reach them. Many women entrepreneurs are not aware of the loans they could avail of through existing Government schemes, such as Mudra and Stand Up India. Such Schemes seek to reduce the real or perceived risks for banks or FSPs to lend to this segment of customers via Credit Guarantees. Now, banks must promote building awareness of these across their distribution networks. Because women have lesser access to mobile and the internet, banks should leverage their wide distribution channels, such as the Business Correspondent model, which can carry the benefits of these schemes to women more effectively.

Enabling Women Micro-Entrepreneurs to Build Digital Histories

A digital footprint of women entrepreneurs can act as a proxy for their lack of banking and credit histories and assets. This can be helpful for FSPs to underwrite gender intentionally. The panel also spoke on two practical examples that could be transformational for women MSMEs.

First is the effort to capture and leverage the saving and lending histories of India’s SHGs. India has 12 million SHGs residing in nearly every district with over 86 million women participants who are rural and run small, home-based enterprises which support their families. These Groups have been created, trained, and supported in small savings, lending and livelihood through the National Rural Livelihood Mission (NRLM). Both NABARD and NRLM are now working to digitize the savings and lending activities of these women which can act as alternate data for lending institutions to tap into.

Mr. Arjun Venkatraman, Program Officer, Digital at Bill and Melinda Gates Foundation, spoke of the Foundation’s  working with NRLM to help build a standardized data registry with variables such as participant demographics , their inter-transactions, savings, and loan and repayment behaviors, which are credible. They are looking to partner with more private sector players to further leverage and strengthen this data over time. The panel discussed how e-commerce platforms such as ONDC and other aggregators could also help women business owners develop a digital footprint at the back of local commerce and transaction. This very model could act as a proxy for lenders, and stakeholders must ensure this is an inclusive platform right at the outset.

Creating an Enabling Ecosystem for a Pipeline of Women Entrepreneurs

When it comes to the livelihood space, the participation of women has traditionally been high. But regarding graduating to larger individual businesses, women struggle due to socio-cultural-economic norms which limit their confidence and risk appetite. India ranks among the lowest on the Mastercard Index of Women Entrepreneurs 2021 global rankings. Hence, building an ecosystem that encourages entrepreneurship among young women could be a long-term enabler, followed by mentoring and confidence-building programs that will help overcome such norms.

Mr. Aditya Murthy, Vice President, Digital Partnerships – South Asia, Mastercard, mentioned how the Mastercard Foundation has been successful in this endeavor and how governments and the social sector can come together to increase entrepreneurial education among young girls to train them for skill development, and digital and financial literacy which will enable them to become successful business owners and entrepreneurs.

In Conclusion

A robust collaboration across governments, NGOs, public banks, MFIs, and Non-Banking Financial Companies is critical to making these solutions a reality. This can help transform the “missing middle” into the “restored middle” to help enable gender-equitable economic growth in the country. Women’s World Banking has partnered with SIDBI to create replicable models under PRAYAS to ensure women entrepreneurs get access to affordable credit to grow and scale their businesses. This could potentially make credit worth INR 320 crores (US$38.6 million) available to 50,000 women entrepreneurs.

Further, we are also working with select cluster-level federations (CLFs) on a pilot basis, under the SHG Individual Development for Women Enterprise program, where we will identify enterprising members of SHGs who can avail of individual loans, and enable the requisite capacity-strengthening inputs on due diligence, application assessment, and business and financial management. When the pilot is rolled out at a national level, the program could potentially serve 12 lakhs (1.2 million) individual SHG women enterprises.

*Don’t miss the official launch of Check Your Bias: Gender Scorecard for Lenders at the 2023 Making Finance Work for Women Summit! Join us this May in Mumbai.