Dr. Saibal Paul
Feb 2012

Targeting to half the absolute poverty with having 37% population under poverty level and employment seeking population of 40 million (9.4% - calculated as a percentage of labor force) India needs a vertically reached effective tool with larger objective of poverty eradication. Contextually as an agrarian economy and having contribution in employment of 52.1 percent of the total workforce, agriculture would have been the best tool to adopt. However looking at the level of stagnation, over employment and high level of disguised employment in the agriculture sector it is crucial to adopt the best possible alternative. In this critical circumstances the Micro Small and Medium Enterprises (henceforth MSME) sector has a justification to emerge as the effective tool as it is showing gradual and steady growth. MSME sector contributes 8 percent of the country's GDP and well known for providing the maximum opportunities for both self-employment and jobs after agriculture sector. It is also contributing significantly to the economy. The growth of MSE (Micro and Small Enterprise) sector is also significant; during 2007-08 the overall industrial growth rate was 8.5% where MSE sector had projected growth of 13.00%.

“Enhancing Skills and Faster Generation of Employment” is one of the "Twelve Strategy Challenges" have been identified by the Planning Commission for preparation of the 12 FYP so it is visible that government will have to envisage generation of employment at faster pace. Ministry of MSME is the nodal agency to execute the vision. Strategic Action Plan of Ministry of MSMEs has envisioned that “the sector will have a healthy growth with a large number of enterprises being set up and their graduation by upscaling into small and medium enterprises. This would be accompanied by enhancement of their contribution to the GDP, manufacturing output, employment and exports.” Hence, it is clear that government is looking for facilitating the enterprises with lower denominations (lower than small implying micro) microenterprises in other word, in large scale for faster generation of employment.

Looking at the target of halving the absolute poverty it is necessary to bring the development to the bottom of the pyramid. Reflecting from the experience, micro units of the enterprises are generally established and developed by the economically backward population.  So there should be a special focus to develop the microenterprises among the poorer segment of the population.

This endeavor is to understand the reinforcing factors for deepening microenterprise initiatives and the strategic advances of microfinance institutions in order to make the government's endeavor effective.

Need of the Micro Entrepreneurs

To develop the micro enterprises among the economically deprived population it is necessary to understand the nature of their need. The major needs are as follows:

ConfidenceBuilding

The majority of the aspiring micro entrepreneurs are from the marginalized socioeconomic category. Unlike prevalent perception usually they have general understanding of the overall process of the trade; mainly they have the understanding of traditional methods and practices. Eventually they might have the basic knowledge of linkages as well. Due to lack of association with the investment, link with the process of enterprise development and running, the confidence is low or absent. In this case it is necessary to induce the confidence of enterprise development among the aspiring entrepreneurs through the community reached and trusted institutions.  

CapacityBuilding

In order to make the enterprise efficient and profitable it is necessary to have upgraded knowledge of the trade including the support system made available by the government and private players. There is another genre of aspiring entrepreneurs, who have the urge for entrepreneurship without any structured knowledge, needs to be capacitated in every aspect of enterprises.

Seemingly there is a strong need of capacity building for the aspiring rudimentary level operators. However primarily, the module provided should be encompassing the horizontal and vertical issues. Secondly in order to convert the capacity into enterprises the comfort level for the risk assumption by the trainees, generally having low socio economic background, has to be induced.

Appropriate financing

As microenterprise is a gradual prospecting device it also needs specific and appropriate finance. Over and inappropriate financing may spoil the endeavor. Considering the fact that aspiring micro entrepreneurs are from the low socio economic group and with little understanding of proper financing needs special guidance; the financing should be in line with the necessity generally low at the beginning with gradual growth. An enterprise goes through different shocks, probability is higher in lower denominations, possibly only credit may not be sufficient as a promotional effort; there is a need of insurance and other financial products to extend overall support to the enterprises.

Linkage support

Proper association of the different linkages make the enterprises successful however the aspiring micro entrepreneurs, who were never been in the process, might be only aware of the local and rudimentary level nexuses; this awareness excludes the knowledge of the larger possibilities and scale. Apart from the local markets there are enormous options. Government has also set up different institutions to support the enterprises. There is a huge need to supporting the microenterprises by extending linkage supports.

Continuous hand holding for considerable time

Considering the socio economic situation of most of the aspiring micro entrepreneurs and lack of confidence emanating from the non participation in the mainstream development process there is a need to support them. The support system should be for a stipulated time frame in order to create a non dependant relationship between the promoters and enterprises. This may range from the development of confidence in the beginning and phasing out with supportive role; the experience shows that this support is needed upto two to three business cycles depending on the competence of the entrepreneurs.

The above discussion is projecting that the micro entrepreneurs have a different set of needs which is much more to enhance the comfort level of aspiring entrepreneurs than only provisioning of finance. Therefore to realize the objective of government “…..with a large number of enterprises being set up and their graduation by upscaling into small and medium enterprises……” there is a need of institution which has direct link with the people, has the experience and capacity to support the micro enterprises and bring them into mainstream for amelioration. Microfinance Institutions have historically proved of having right mix to cater the need of the micro entrepreneurs.

The Missing Links

The average portfolio per client is increasing. In 2010-11 it had a range between Rs. 4900 to Rs. 6610. Evidently it is at lower range and implying the range manageable by the poorer segment of the population. It is the segment of aspiring micro level enterprise operators who are out of the purview of formal credit and needs proper support.

MFIs who are majorly supported by the banks are the receiver of the priority sector indirect lending. In order to protect the client from over indebtedness, Reserve Bank had a calculation and instructed by the notification that per client portfolio shall not cross Rs. 50000 if the institution wants to access the priority sector lending. Looking at the average range of requirement of the clients and government's dictum it can be said that the real microenterprise financing has to be ranged far behind the categorization of micro enterprises by the government.

As we have discussed microenterprise needs lower end of finance however the government's definition of microfinance is permitting higher range. This situation may shift the institutional focus to the higher end resonating into higher probability of defeat of objective of the Ministry of MSME - promotion of large scale of microenterprises and gradually making it big. A look at the range of registration of the enterprises with the DIC can generate a deeper understanding on this issue; the total registration comprises of 66.67% manufacturing enterprises and 33.33% services enterprises however only 8.21% (76,654) of the manufacturing enterprises were ancillary (comparatively enterprises with lower denomination). The percentage will be even lower in case it has been calculated on total registered units.

Quoting from government's report “Access to adequate and timely credit at a reasonable cost is the most critical problem faced by this sector… there has been a decline in the share of micro sector as a percentage of NBC (of public sector banks) from 7.8 per cent in March 2000 to 4.9% in March 2009” is showing the status of mainstream financing mechanism for the MSME.

Different segment has different strengths and requires different support stream; in line with earlier discussion microenterprise segment needs special support of hand holding and confidence building along with other general supports. Ministry of MSME is instrumental in developing and strengthening the sector however the official document is projecting the absence of special endeavor to cater the microenterprise segment and have equal weightage for the different streams of supports.

Putting together the discussion it is visible that there is a substantial mismatch between the demand and supply stream of the micro enterprises.

The major need from the demand side is overall support starting from the confidence building; the priority areas of the supply side have a pronounced absence of it.

It needs to be understood that different segments of the enterprises are operated by different set of people having different socio-economic background. This difference in the socio economic background has resonated into different socio-economic participation which has built up different socio-economic comfort level. This comfort level has to be taken in consideration during planning. It is an appreciating drive of government to bring in the concept of enterprises instead of industry however doing so the focus on the different needs of the diverse segments has diluted; the focus is towards the enterprises with higher denomination.

Microfinance Institutions – Growth and Reach

Microfinance Institutions are the important ally for the financial inclusion and this set of institutions cater to the poorer segment of the population. During 2010-11, Indian microfinance industry has catered 76.7 million clients with 514 billion INR. In line with the same data set the growth is maximum among the different models working for microfinance. 

The calculation on SaDhan's Bharat Microfinance Reports, the loan portfolio of Indian microfinance sector has Compound Annual Growth Rate (CAGR) around 57% with the client outreach CAGR of 34%; considering the tough time of the industry the statistics is quite positive for the sectoral initiative and reach.

According to the Bharat Microfinance Report of SaDhan (encompassing reporting from both for profit segment as well as not for profit segment of the microfinance institutions), historically  more than 80% of portfolios of the MFIs are extended for the promotion of non agricultural income generation activities which is micro enterprise promotion.

The MFIs are reaching to the 70% of the poorest districts of India. The government's model to reach the last person e.g. RRBs etc didn't work out as being challenged for different internal factors however the models used by the MFIs have the direct and regular interactions with the end users resonating into deep relationship with them and on the support to them.

The above discussion is generating clarity on the reach of the MFIs to the poorest zones of India and the quantum of portfolio extending to microenterprises.

Considering the needs and sufficing with the statistics it can be assumed that MFIs can be instrumental and supportive to ongoing economy of the microenterprise sector by finance and regular handholding

Bridging The Gaps

In order to activate government's vision there is a need of incremental effective credit to the micro entrepreneurs; mainstream financing mechanism which can be effective in this case is receding. In this challenged situation the statistics of MFIs is favorably posing them to finance the micro enterprises. Looking at the situation MFI channel can be utilized by government with a provisioning of multiple needs based lines of credit for the MFIs to support microenterprises.

There is also need of public private partnership in the MSME sector not only for planning but also for implementation. This partnership is needed in the areas of registration and capacity building as well as in implementation of the different MSME schemes. In this case MFIs being the micro level operator having the capacity is the best alliance.

Talking about the registration, it is already evident that large numbers of microenterprises are either being promoted or being supported by the MFIs and most of them are out of purview of DICs. In this case the MFIs can be the aggregator of the enterprises and do the registration on behalf of the DICs. It will mainstream the enterprises for further development.

Evidently MFIs serve as a backbone for the real micro level enterprise operators implying capacity of the MFIs to be effective channel for capacity development of the micro entrepreneurs. Most of the MFIs are credible to upgrade the capacities of the microenterprises however government can develop the capacity of this channel in order to enhance the effectiveness of this channel resonating into better support to the microenterprises.

There are different schemes of the government which are not properly communicated as well as not implemented due to the ineffectiveness of the predominant institutions. MFIs being imbibed with the knowledge of the operations can be efficient and available infrastructure can be utilized by the government.

The capacity building of the DIC officials needs to be given attention; though the enterprise concept has been introduced in the MSMED Act but the officials need reorientation to understand the micro initiatives. Experience shows that due to non clarity in the concept they are reluctant to acknowledge the real micro initiatives e.g. cycle repair shops, spices grinding shops etc as enterprise. MFIs can be effective institutions to extend the exposures to the DIC officials to understand the efficiencies and needs of the micro initiatives.

Government has the mandate of inclusive growth with larger vision of poverty reduction where microenterprise as a tool includes people in the development by inducing financial stability and enhancing self esteem. In order to realize the objective of the ministry of MSME to flourish the MSME segment, it needs to extend special attention to the specific needs of the microenterprises; it also needs a public private partnership model to reach the last person and make the development vertical and horizontal. MFIs are one of the most effective channels to work on. Primarily it has the trustworthy relationship with the micro entrepreneurs, has the capacity to strengthen the enterprises and most importantly the MFI s has historically proved to hold the hand of the poorer population of the country. 

 

Government's Definition of Microenterprise  Micro Small and Medium Enterprises are governed by Micro Small and Medium Enterprises Development Act 2006. MSMED Act was notified in 2006 to address policy issues affecting MSMEs as well as the coverage and investment ceiling of the sector. By 2007, with an amendment in the Government of India (Allocation of Business) Rules, 1961, the Ministry of Small Scale Industries and the Ministry of Agro and Rural Industries were merged to form the Ministry of Micro, Small and Medium Enterprises (MSME). This Ministry now designs policies, programmes, projects and schemes and monitors their implementation with a view to assist MSMEs and helps them scale up. Classification of enterprises The definitions and the coverage of the Small Scale Industry (SSI) sector were broadened significantly under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 which recognized the concept of “enterprise” as against 'Industries' to include both manufacturing and services sector besides, defining the medium enterprises. Enterprises classified broadly into i)          Enterprises engaged in the manufacture/production of goods pertaining to any industry & ii)         Enterprises engaged in providing/rendering of services. In case of manufacturing Micro Enterprises has the investment limit upto 25 lakhs for plant and machinery (excluding land & buildings); In case of service Micro Enterprises has the investment limit upto 10 lakhs in equipment.