Small women entrepreneurs struggle for funding

Mumbai: A majority of women entrepreneurs in India cannot access institutional finance for many reasons, including the fact that fewer of them have title rights on property that can be used as collateral.

There’s also a general aversion by financial institutions to fund high-risk small businesses, experts say.

India has an estimated three million women-owned enterprises that employ over eight million people and constitute about 10% of all small businesses in the country. Only 27% of these have access to institutional finance, said an International Finance Corporation (IFC) study released on Tuesday.

This forces them to approach moneylenders, who typically charge exorbitant interest rates, besides semi-formal sources such as chit funds.

“The main issue is that women do not have sufficient collateral rights in rural India against which they can avail loans,” said Vijay Mahajan, who pioneered microlending in the 1990s by setting up Basix, India’s oldest microfinance institution (MFI) and livelihood promotion group. “Most banks look for some collateral even while lending to small entrepreneurs. In the case of women entrepreneurs, who do not have sufficient rights on title, it is difficult to secure such funding,” he said over phone. Of the total financing demand of $158 billion (around ₹ 9.64 trillion) for women-owned businesses, formal sources provided only $42 billion in 2012, leaving a significant gap of $116 billion that financial institutions can meet through specially tailored products and services, the study said.

“The reasons for poor access (of women to institutional finance include) limited financial awareness and understanding of financial products and services, lack of adequate collateral, husband’s or father’s signature to approve loan applications, and lack of confidence to approach formal financial institutions,” Jennifer Isern, IFC manager for access to finance advisory, said in an email response.

A lack of clarity on what constitutes entrepreneurship also has created confusion, Mahajan said.

“Even a woman who sells vegetables on the roadside is an entrepreneur,” he said. “But a bank may not recognize her as one and give money.” There is a need to develop specialized retail institutions focusing on women entrepreneurs, Mahajan said.

The lack of support for entrepreneurs from the banking system and private investors is a larger one that’s not restricted to women, experts say.

“This is a bigger issue rather than that of women entrepreneurs,” said Bindu Ananth, president of the IFMR Trust, which works in the area of financial inclusion. “If you are a lender, you would need some certainty that your money comes back (from the borrower). In the case of small businesses, banks and equity investors are not very comfortable to give money to micro and small businesses until they reach a certain size.”

Bankers agree and point to the many practical difficulties in funding small businesses. “Many projects, which approach us for funding, are not bankable,” said Sushil Muhnot, chairman and managing director of state-run Bank of Maharashtra. “Lending to such units will have to be done at a higher rate due to the high-risk nature of such borrowers. It is not often feasible to price loans accordingly. What is needed is some intervention from government in terms of subsidies to help such start-ups.” About 40% of the adult population in India does not have access to formal finance.

Last year, the government set up Bharatiya Mahila Bank to meet the funding needs of women. The bank opened 14 branches this fiscal year and plans to set up an additional 55 in the next, chairperson and managing director Usha Ananthasubramanian said on 11 March. While the bank will accept deposits from everyone, it will mainly lend to women.

For women borrowers, MFIs have been a major source of funding.

MFIs, which provide small loans to poor borrowers at 24-36% interest, took a hit in October 2010 after a law in Andhra Pradesh curtailed their operations in the state, caused the repayment rate to fall below 10% and led to the shuttering of many smaller MFIs.

After this, banks too turned risk-averse to the sector nationwide and pulled back on funding. The funding scenario has since improved after the Reserve Bank of India announced rules to govern MFIs operating as non-banking financial companies, which control the lion’s share of the microlending market.