The Micro Industry Finance Conundrum

Disclaimer: Everything written in this blog is a work of fiction so don't get any crazy ideas after reading it.

If you came here thinking this might be another piece on the funding ecosystem of the country for startups , you might be in for a rude shock. Although it is definitely connected to financing, the use cases I'd would be talking about are tad different from what we have heard of.

Let us consider a scenario where Vivek , a resident of Deoria with a graduate degree and couple of years of experience under his belt comes across an idea. He validates the idea with 200 something pieces of his product and sells them handsomely at a profit margin of 50 percent. Based on his learning he decides to start his business and calculates the working capital required for his business would be around 1 lakhs INR. He goes to the nearest bank and meets the manager there. The manager tells him that he would have to arrange for collateral. Vivek doesn't come from a privileged background. He can barely make his ends meet through some produce from his fields. If this business would have worked he could have bought medical insurance for his old parents. He tries his luck in other banks just to receive occasional lip service or some frequent rejections. He decides to give up on his entrepreneurial dream as making one's ends meet through a job is relatively easier and gets into a job.

Take the case of Sunny. Sunny lost his father to Dengue 3 years back. He has had to sell off his property and fields to fend for his family. He now has to look after his old mother and his wife. Recently he became a father and now has to look after the newborn as well. Sunny has always had this dream at the back of his mind to do 'Udyamita' or 'Entrepreneurship' but he although he has a solid product idea and a brilliant business plan through which he could be cash flow positive in 7 months he needs some seed money to start his business. He hears NABARD provides financial assistance to entrepreneurs like him. He goes and visits the NABARD office and speaks with the NABARD officer. The officer assures him that the Government has rolled out a plethora of amazing financial schemes to help entrepreneurs. Sunny finally sees a ray of light in his otherwise dark life. He fills up the application form and submits it along with all the corresponding documents. The application keeps traveling between the desks of 'Sarkari Babus' from Lucknow to Mumbai and keeps getting rejected on account of minute resolvable clauses. Its almost 13 months now and Sunny now works in a retail store in Lucknow and makes some amount of money , max of what he sends back to his family in Deoria. Sunny feels that starvation is a far greater motivator than entrepreneurship. Existential crisis could crush any dreams anyone has had.

Let us talk a little about Vibha. Vibha has been a self employed woman for close to a decade. She has built and sold everything from pickles, jewellery, handicrafts etc. She recently decided to be a distributor for a Sanitary Napkin brand called 'Sakhi'. She feels she could create a great distribution mechanism for the Sanitary Napkin business looking at her entrepreneurial career over the last 10 years where she has time and again proven herself. Since most of what she makes through her entrepreneurial efforts is reinvested back in her business she has access to limited funds. Surprisingly for the first order worth 10K she ended up making a whopping profit of 73 percent. Now Vibha wants to order more and even has ideas around buying a Sanitary Napkin manufacturing unit but doesn't really have the capital. Vibha connects with some Micro Finance funds based out of South India and they tell her that they would want to help her if she chooses to move from North India to South India. Vibha cannot afford to move as her life is around Deoria where her entire family lives so Vibha's dreams of scaling up the new business gets squashed right there.

In all the above use cases what did you observe? Did you seemingly see a common pattern? Well let me break that to you. All of the above somehow tend to prove that getting finance for your business is practically an impossible task. Well why is it impossible? You'd probably think I am playing a bluff. I wish that were true. Unfortunately the funding scene is real bad inspite of all the assurances the system provides from time to time. Let us first delve a little deep to understand why most of these small scale entrepreneurs cannot get access to finance or funds be it loans or grants.

Deoria a small town in Eastern UP is renowned for its agricultural products. It houses a population of 33 lakhs with an 83 percent literacy rate(as Wikipedia says but that can always be wrong). The tendency of the diaspora has always been to work for other people so over the last 2 millenium people have gone out of the city and moved to distant places for the sake of livelihood. And India is not anew to the said phenomenon. Cross migration has been happening post independence. Unfortunately cross migration has resulted in resource depletion from cities at an alarming rate. The water crisis that happened in Chennai is a ramification of the said phenomenon. If Deoria has to develop , we need to eradicate poverty forever. Easier said than done. Having said that the only way to do it is by creating small enterprises or micro enterprises in Deoria that could locally and regionally absorb people. That would help the per capita income of the diaspora come up above $2. I t would also stop cross migration. Not to mention the contribution of small enterprises towards the Indian economy. At a macroeconomic level it could help us achieve a consistent growth rate of 8% plus. China grew 9% consistently for 30 years before it became a superpower. We could touch base that. However if we were to build an entrepreneurial ecosystem in Deoria we need a sound funding arm in the region.

As of now what we have seen is an abysmally small funding landscape. There isn't much optimism around getting loans. Banks don't prefer providing loans since the NPA is around 67 to 72 percent in the region. For MUDRA loans banks do all types of lip service but when it comes to the transfer part there is always some kind of a clause that pops up which stops the money from flowing into the entrepreneur's account. We have tried it out with almost all the banks in Deoria and it's the same predictable response we get every time we meet up with one of the managers of a bank based out of Deoria. They would assure us they are trying their best but it usually doesn't yield any results.The small scale entrepreneur like Vibha or Vivek aren't able to secure any loan inspite of repeated visit to almost any bank. So banks are out.

How about NABARD or SIDBI. Well I don't doubt the noble intention of these respect worthy financial entities. I am completely in agreement with the fact that they were created to provide entrepreneurs with unfettered access to funds for building micro enterprises. If that be the case then why is it that our micro entrepreneurs barely receive any assistance from these respective bodies? Why do their applications never receive a stamp of approval? Why is it that innumerable visits to officers in charge does not provide anything other than empty assurances? Why isn't Sunny getting the loan he applied for? Is it red tape and bureaucracy that inhibits the materialisation of the loan? Unbeknownst to what the actual reason is , we know for sure Sunny who could have been a great entrepreneur, with the right amount of intelligence, passion and connect could have worked wonders with his enterprise, if only he had received his ask., is now going to be a paid labour for the next decade or so. He might not be able to come out of this vicious cycle of poverty in his lifetime and maybe his family will feel the harshness of life as they move ahead. Unfortunately there isn't a mechanism to deal with that.

Let us talk about micro finance. I can't deny micro finance has been a spectacular success in India with SKS and many other micro finance institutes. However micro finance is concentrated around some areas and the reachability is limited. In a place like Deoria and many Tier-3 cities you really don't see many micro finance companies(MFCs). This still seems like an option that could be cracked so we at Jagriti Enterprise Center are committed to finding a formidable solution for the same. However its pretty much a moonshot and not every moonshot produces a Kryptonite.

How about Angels, VC, PE or hedge funds. Looking at the quantum of investments they make to get a 10x return I doubt they'd actually care about such micro investments. That leaves us with several Impact Funds which fund businesses so they can generate an exponential and measurable impact. Unfortunately they rely on a lot of data points that revolve around the impact created by other conglomerates or companies around this region(like Shakti Ammas created by Unilever). None of those data points support our hypothesis that we can spin this region into a high productive zone since we are starting from scratch and we got a clean slate.

Last but not the least are the Government grants or private grants that we are banking on. I have already written to a lot of people who have invested in small businesses telling them how our businesses could change the landscape of the nation 10 years from now. Till date I haven't yet received any update from them. But I am hopeful we should be able to crack this part of the puzzle. Seems grants are the only way to fund businesses in India.

Now that you have a precise idea about the funding landscape in the context of micro enterprises you do realise how difficult it is to start and run a small business in India devoid of a sound funding mechanism. Micro enterprises are the growth levers of India and if they don't receive adequate care and relevant support from the system then it would affect our growth drastically. So my question to the intellectual community is - how do you solve the funding problem for micro entrepreneurs in Eastern UP? From what I have seen and heard from people around financial entities is merely hogwash. Till that happens we won't really transition to a developed economy and whatever growth we'd achieve would merely be unilateral growth which is not a healthy economic stimuli.