Financial Inclusion for Women Business Enterprises: The ‘Missing Middle’

Financial Inclusion for Women Business Enterprises: The ‘Missing Middle’

Co-authored by Anupama Ramaswamy and Sanjana Singh

The growing awareness on the role of women entrepreneurs in catalyzing economic and social development hasn’t translated into financing support for women owned businesses in India.

Gender Gaps in the Entrepreneurial Ecosystem

Globally, women’s share of entrepreneurial activity is lower than that of men, with very little advancement over time. The gap in early stage entrepreneurial activity rate between men and women is the highest in India in comparison to other BRICS nations (GEM, 2014). The Gender GEDI Index, that evaluates the entrepreneurial ecosystem for women in various countries, ranks India second to last, behind Egypt and Morocco out of 17 countries.

Women owned businesses in India are under capitalized and there is a financing gap of Rs. 6.37 trillion. 73% of the total finance demand among women owned business in India remains unmet. – IFC report, 2013

The gender gap in entrepreneurial activity and capitalization can be attributed to the differing economic, financial and socio-cultural factors that impact the business environment for entrepreneurs. Female entrepreneurs in India are concentrated in sectors characterized by low productivity, limited growth and tend to be home-based, concentrated in the areas of small-scale entrepreneurship.

43% of women entrepreneurs cite issues in obtaining finance as a reason for business discontinuance, as compared to 26% male entrepreneurs. – GEM report, 2014

The lack of access to financial capital, limits their potential to transition from micro to small or medium enterprises. Socio–cultural barriers such as limited mobility, gender biases further undercuts their ability to scale. A study by UNIDO notes that a country’s productivity can increase by as much as 25% if discriminatory barriers against women are removed.

The Missing Middle: Financing Women Owned Enterprises

Access to financial resources has been recorded as the greatest constraining factor for women across cities in India, receiving the lowest scores on access to formal sources of finance on the Gender GEDI Index (2014). Furthermore, Athena Infonomics’ research shows the financial ecosystem for women in the National Capital Region scores 29, and Bangalore scores 42 on a 100 point scale on the Women Entrepreneurial Environment Index (WEEI). This indicates women entrepreneurs are dissatisfied with their level of access to finance, with most women unable to finance their business requirements.

Women micro enterprises in India are classified as high risk by financial institutions due to inability to showcase scalability and meet collateral requirements, despite NPAs on loans to women showing a decline from 6.5% in 2005 to 3.8% in 2014 (RBI). While efforts to finance MSMEs though priority sector lending targets and Credit Guarantee Schemes have been undertaken; women entrepreneurs get excluded from mainstream financing efforts. They are often referred to as the ‘missing middle’. These sets of women enterprises have financial needs that are greater than a SHG, but are not profitable enough for a commercial banker. Women MSMEs who largely operate in service driven sectors need smaller quantum of funds to finance working capital requirements. The fund requirement typically does not exceed INR 50 Lakhs. Given the high administration costs associated with processing smaller loan amounts, women MSMEs get excluded.

Figure: Proportion of Credit to Women and NPAs

It is important to note that the financing gap is not entirely due to the absence of financial programmes and schemes for women. Several banks have instituted schemes that target women enterprises such as the Credit Guarantee Fund Scheme. Concessions in margin and interest subventions have been extended to aid financial assistance for women within these mainstream programmes. Furthermore, the Government of India has launched the ‘Bharatiya Mahila Bank’, the world’s third “women-only” bank in 2013, to provide tailored financial services. Despite these measures, bankers are reluctant to lend to women in service driven sectors, perceiving them as high risk. Interactions with Public Sector Banks reveal that banks just manage to meet the minimum threshold of 5% credit to women (not only women entrepreneurs) as mandated by the RBI. Women on an average constitute only 6% of the total MSME advances. Banks that perform relatively well are Canara Bank, Indian Bank and Vijaya Bank noting higher proportions of lending to women.

Why are Women Owned MSMEs Financially Excluded?

Issues in seeking external sources of finance are common to all MSMEs however, the prevalence of gendered biases in access to finance arise due to, women’s lack of access to immovable assets, their marital status and stereotypical views on the capability of a woman entrepreneur, despite women borrowers reporting higher repayment and lower default rates (Athena Infonomics Research). Other factors that limit the financing of women enterprises is low sector viability; women operating in ‘traditionally gendered’ sectors are not seen as viable enough. Limited access to business networks arising from mobility issues constraints their access to credit. Excessive and complicated loan application procedures further discourage women from seeking loan financing. Challenges are intensified with women unable to produce proper documentation for obtaining a loan – the role of non-financial services such as training have an important role to play here.

On an average:
– Women make 9 visits for a loan application
– It takes 33 days to complete the application process
– 57 days average turnaround time

On the supply side:
– Financial institutions lack gender-inclusive mandates and vision statements
– Government financed programmes such as the Credit Guarantee Scheme is insufficient to absorb the risk exposure
– Public Sector Banks are characterized by manpower shortages resulting in inability to serve the large and growing MSME segment

Financing Women Entrepreneurs: The Way Forward

To increase access to credit for women entrepreneurs, the following set of action points are recommended to be taken up by financial institutions, Government and women borrowers:

– Institutional credit often does not reach the intended beneficiaries due to the large presence of ‘women-owned’ enterprises, which are in reality not managed by women. The government could address this problem by certifying genuine women managed businesses

– Revise Credit Guarantee Fund Scheme guidelines to include trade related activities and inclusive measures for women entrepreneurs

– Offer non-financial services such as training and mentoring to women borrowers

– Engage business correspondents and external facilitators to create awareness on loan offerings and schemes for women and help with application processes

– Use qualitative credit assessment mechanisms as an alternative to traditional appraisal processes in evaluating women-led SMEs

– Use technology based workflow and online credit application for small ticket loans to address manpower constraints

– Women should foster non-credit banking relationships with banks and participate in training and mentoring workshops to strengthen financial literacy

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Radhika Asrani
Radhika is interested in social sector development. Her skills focus include managing research activities, including designing research instruments, developing robust analytical frameworks, impact evaluations and policy design.