November 29, 2022
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The Micro- Entrepreneurship route to financial inclusion

V.P. NandakumarOne of the surest ways to promote the objectives of financial inclusion and inclusive growth is to kick start micro enterprises and empower our micro-entrepreneurs who struggle against great odds. How can this be done? Let me talk from my experience with the gold loan customers of Manappuram Finance who increasingly happen to be small shop owners, traders, the self employed etc. These are the people who belong to the class of what may be called micro-entrepreneurs.

We are familiar with typical micro enterprises like small shops and retail establishments, push-cart vendors, grocery stores, service and repair outlets etc. In fact, micro enterprises contribute directly to society by improving the quality of our lives (e.g. we get to buy fresh vegetables at our doorstep). Moreover, by standing on their own feet, they are not dependent on the government, and don’t strain the social welfare budget.

People come into micro entrepreneurship by inheritance, by emulating the examples of others around them, or because of a sheer lack of alternatives. The process of starting a micro enterprise is always informal and it can even be a spur-of-the-moment decision. Micro enterprises cannot get started when complexities are imposed, like preparing project reports, or compliance with many statutory requirements etc.

Therefore, for micro-entrepreneurship to take off and thrive, it is essential that entry barriers be lowered. When the entry barriers are high, people low on skills and education are easily deterred. Indeed, the only requirements that may reasonably be expected of a micro-entrepreneur are access to some capital, some contacts, some idea about the business, and a measure of confidence.

The other important point is that the major investment of the micro entrepreneur is not capital but time. Therefore, the make or break factor is not ROCE (return on capital employed) but what may be termed ROTE (return on time employed). This is a crucial distinction that must be made before any meaningful discussion on financial inclusion. Too often, with our focus on ROCE, we assume that the cost of capital is the significant constraint faced by micro enterprises and that a solution to their woes lies in reducing the cost of capital. This is a fallacy.

A vegetable vendor borrows Rs.500 in the morning to buy vegetables for the amount. A day’s hard work nets him a profit of Rs.250, i.e. 50% returns in a day. Work out the return over a period of one year (with 300 working days) and it’s a staggering 15,000%. No MNC, not even monopoly businesses, earn these kinds of returns. Indeed, a financial analyst looking at these numbers would say this is a great business to be in, but we know better than to go by these (misleading) numbers. Look at the return on his time instead. If he works for ten hours a day, it turns out his fabulous return of 15,000% p.a. is worth exactly Rs.25 for every hour of effort. In such a scenario, if he pays an interest of Rs.50 every day on the amount borrowed, the rate would be calculated as 10% per day, or 3,000% annualised! Is that a crippling burden? When you consider that it still leaves him with Rs.200 in his hands, enough to take care of his family, maybe not.

In a micro enterprise, the capital required to get going is always modest. At the same time, since those who take to micro-entrepreneurship are usually quite poor, they may not have even this modest amount with them. That’s why one of the biggest entry barriers to micro-entrepreneurship is access to capital. But, it’s not the cost of capital, measured by its annualised rate of interest, that matters, rather its timely availability. Every day lost is earnings for the day lost. The promise of cheap loans entangled in bureaucratic procedure is no help. Indeed, it can even kill the enterprise. It follows that if access to small loans can be eased, you are automatically promoting micro-entrepreneurship.

Until fairly recently, it seemed that microfinance was the ideal way to fill this gap. However, recent developments have belied the promise.  Is there anything else that would work? Consider this. On Nov.30, 2012, the Economic Times carried a front-page article with the title “Entrepreneurs Bond with Yellow Metal”. It featured the story of Aneesha Binu, a woman entrepreneur in Idukki District (Kerala) who runs a beauty parlour. Aneesha had set up her business with money obtained by pledging her jewellery. Aneesha, incidentally, is a customer of Manappuram’s Rajakumari Branch, and we have come across thousands of examples like hers.

We are familiar with how mobile telephones made things easier for small businesses and services. Earlier, the cost of renting a shop or office space, and waiting for the telephone connection to materialise was a huge stumbling block to the common man who wanted to start off on his own.  Now, with a mobile phone, anyone can operate from home and be in business overnight. Likewise, many have dreams of starting something on their own but arranging for adequate working capital is a hurdle. With access to hassle-free gold loans, they can get started immediately, without having to go chasing after a bank.

Gold loans promote micro entrepreneurship. In a country with low levels of financial literacy, micro-entrepreneurs require access to small loans that are readily available without elaborate paperwork and procedure. A gold loan is ideal for this purpose. Aneesha’s example proves that gold loans lower the entry barriers to micro-entrepreneurship.

That’s why, today, about a third of Manappuram’s gold loan customers belongs to the micro enterprise segment—traders, shopkeepers, the self-employed etc. They use gold loans as a hassle-free source of working capital to meet the requirements of day-to-day business.

V.P. Nandakumar

MD & CEO, Manappuram Finance Ltd.


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