Improving Access to Finance for Women Entrepreneurs

by Shreejit Borthakur

Over the last decade, there has been a change in the status quo with a rapid growth of women entrepreneurship in India. The number of women entrepreneurs has more than doubled since then, and now there are more than eight million women-owned enterprises in India. Besides contributing to India’s growing GDP, women entrepreneurs cumulatively provide employment to more than 13 million people and these numbers are only likely to increase with time. Many drivers have come together to allow for this change including targeted entrepreneurship development programs for women, improvement in women literacy rates, and attainment of higher education. It is however; important to note that women-owned entrepreneurs face a unique set of challenges which restrict them from scaling up. Subsistence entrepreneurship is still the trend and while woman-owned enterprises employ more than 13 million people, less than 17% of these businesses have a hired worker. As per the International Finance Cooperation (IFG), while women entrepreneurship has grown in India, around 90% of these businesses are in the informal sector, where the business objective is subsistence. Subsistence entrepreneurship is not always a choice but is a result of the challenges which entrepreneurs face.

Inadequate access to debt finance is a key roadblock to the growth of women entrepreneurship in India. The issue of inadequate availability of finance for women entrepreneurs in India is multidimensional. There are both supply side issues (issues from the side of the financial institution) and demand side issues (issues from the side of women entrepreneurs).

Most formal financial institutions have a high-risk perception with respect to lending to women entrepreneurs. In India, the rejection rate when a women entrepreneur approaches a financial institution for a loan is 2.5 times the rejection rate for male entrepreneurs. Consequently, informal sources of finance such as from friends, family and money lenders contribute to more than 92% of the finance supplied to women entrepreneurs. These sources are however inadequate when the entrepreneur might want to scale her business. Moreover, women entrepreneurs often perceive an average bank environment to be not conducive to women customers. The lack of adequate women relationship managers has been often highlighted as a key reason as to why women entrepreneurs avoid bank visits.

It is equally critical to address the various demand side factors which prevent women entrepreneurs from approaching banks. First, the lack of awareness regarding financial products makes it easier for women entrepreneurs to raise money from informal sources. Because of this lack of financial literacy, women-owned businesses often do not adhere to the appropriate reporting standards which further leads to a higher rejection rate from formal financial institutions. The high rejection rate has a multiplier effect and it often instills a lack of self-confidence which can have a negative impact on any entrepreneurs’ willingness to scale. A rejection often prevents women entrepreneurs from approaching formal institutions fora subsequent attempt. Second, most of the formal financial institutions still prefer to lend against collateral. Cultural, traditional, and legal restrictions often prevent women from having ownership of land or assets. This considerably restricts their ability to raise finance.

Over the last few years, the Government of India has introduced several schemes and programmes to enhance lending to enterprises and startups. For example. the Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE) was set up by the Government of India and the SIDBI to allow financial institutions to lend to small businesses without the need for a collateral. The scheme was designed to compensate the lender (50% to 85% of the credit availed) in case the borrower is unable to return the collateral-free loan. Similarly, the Startup India programme was set up to provide a wide array of support to Indian startups such as incubation services and collateral free loans. Although the initiatives have been successful to a certain level in bolstering entrepreneurship in the country, their impact on women entrepreneurs is yet to be seen. This is because most of the newer schemes such as CGTMSE, Startup India, and MUDRA loans still operate through banks which eventually consider women borrowers as high risk. Secondly, the largest component of women entrepreneurship focuses on the service industry, and banks usually prefer lending to brick and mortar businesses. Thirdly, since 90% of the woman-owned businesses are in the informal sector, banks cannot lend to them. These businesses are not registered, a preliminary eligibility criteria which banks want borrowers to fulfil. While other schemes such as the Mahila Udyam Nidhi Scheme and the Rashtriya Mahila Kosh Scheme have successfully provided access to micro-credit exclusively to women entrepreneurs, the ticket size is inadequate for enterprises that want to scale. In addition, micro-credit normally has s high interest rate associated with it, often discouraging women from borrowing.

Consequentially, there is a need to introduce support systems which are refined and tailored to the needs of women entrepreneurs. One of the key solutions that should be explored by the stakeholders in this space is to subsidize interest rates for a targeted section of women entrepreneurs. Interest rate subvention is not a new concept and has been used by the Government to support agriculture in India. In 2016, the Government approved the interest subvention scheme for crop loans which provided a 5% interest rate subsidy for short-term crop loans. However, the maximum loan size was restricted to Rs 3 lakh. With respect to women borrowers, the Reserve Bank of India announced an interest subvention for Women Self Help Groups from 250 districts in India. However, the loan size here was also capped at Rs 3 lakh. While capping the ticket size of these loans is essential to mitigate sub-lending of capital, the maximum loan size is not adequate to scale businesses. Consequently, it is advisable for the Government to work with other potential financiers to set up an Interest Subvention Fund particularly for women entrepreneurs who operate MSMEs.

While designing an interest rate subsidy scheme, stakeholders should have a thorough understanding of both the supply side and demand side challenges which women entrepreneurs face. The scheme can then be paired along with other Government initiatives such as Startup India in a bid to create an entire ecosystem for women entrepreneurs. While the implications of such an intervention will be most seen in the form of rapid growth of women entrepreneurship, the associated social impact will lead to a society where issues such as gender empowerment will be a talk of the past.

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