Enabling the Growth of Nano Entrepreneurs Through Customized Credit Solutions

India’s 63 million micro, small, and medium enterprises (MSMEs) are vital to the economy, contributing nearly 30% of the GDP and employing about one-third of the workforce. Within this sector are 11 million nano entrepreneurs who run small retail or kirana shops and small manufacturing units with annual turnovers between INR 1-10 million and employ 20 million people. Nano entrepreneurs need an estimated $25 billion in credit to achieve sustained growth, highlighting their crucial role in India’s economic future. However, they often face challenges accessing affordable loans from formal financial institutions because they are seen as high-risk and have smaller credit needs than typical borrowers — usually between INR 0.1 to 1 million.

Challenges in Accessing Formal Affordable Credit

Lenders often see nano enterprises as a risky investment because they usually don’t have a credit history, can’t provide collateral, and aren’t formally established — which makes it hard to judge their creditworthiness. And traditional banks are hesitant to offer loans to this group because smaller loans with flexible repayment options usually require higher servicing costs.

In addition, 70% of the credit needed is for working capital, which is challenging to assess because lenders and borrowers do not have access to the same set of information, cash flow can be unpredictable, and frequent data points are necessary to evaluate credit risk and repayment behavior. Further, effective controls often require physical touch points that digital only models can’t provide.

The Path Forward: Customized Credit Solutions

To help small businesses grow, it’s important to offer customized solutions— like smaller loans and efficient digital services— while keeping careful checks and in-person support. Experts predicts that, by 2026, 80% of merchants will use digital payments, making it more common for lenders to use digital transaction data to offer loans based on cash flow.

New co-lending models — where fintech companies, Non-Banking Financial Companies (NBFCs), and Microfinance Institutions (MFIs) team up with banks — offer a promising solution to the regulatory limits NBFCs and fintechs face when providing working capital loans. This approach helps partners share risks fairly and allows banks to better use their large capital reserves.

Here are a few innovative NBFCs offering affordable formal credit solutions to nano enterprises:

Financial Delivery and Impact

Arthan Finance provides short and long-term loans to small-town nano entrepreneurs using AI-powered credit scoring, transaction-based lending, and purpose-based underwriting. By March 2024, Arthan’s portfolio reached INR 1,249 million across 27 branches and digital partnerships.

CredRight offers collateral free term loan to chit fund subscribers and beyond, using cash flow assessments and other data trails that ensure effective credit underwriting. With more than 70 branches, CredRight has amassed an active customer base of over 7,000 nano-borrowers and an AUM of INR 3,006 million as of March 2024.

Kinara Capital drives economic inclusion at scale through customized programs for unsecured loans, some of which are focused on women entrepreneurs, as well as larger loans backed by a collateral. By March 2024, Kinara’s loan portfolio exceeded INR 30 billion and created over 100,000 job opportunities — including 33,000 for women — demonstrating significant social impact.

Kaleidofin leverages advanced technology and strategic partnerships to deliver financial services through its innovative KiScore and KiCredit platforms. By March 2024, Kaleidofin had underwritten loans for 4.8 million nano entrepreneurs, with approved loans totaling INR 205 billion, and plays a pivotal role in enabling credit access for underserved segments.

Supporting Nanos Through Customized Credit Guarantees

Credit guarantees is another way to help strengthen the ecosystem that offers credit to nano entrepreneurs by helping better assess and transfer some of the credit risk associated with this segment (lack of collateral and credit histories and limited digital footprints of business cashflows). Guarantees help the lenders reduce provisioning requirements as well as improved cashflows in case of portfolio defaults.

• Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTSME) was launched by the Government & SIDBI to offer credit guarantees to financial institutions offering loans to MSMEs and has provided cumulative guarantees of INR 1,047 Bn to over 228 NBFCs and Banks. The scheme encourages financial institutions to provide data-driven credit solutions to businesses they might have otherwise considered high-risk, fostering economic development.
• FinReach is a much more recent entrant set up in 2022 to help facilitate credit guarantees for lenders to micro and small enterprises, aggregating guarantees from larger players such as Development Financial Institutions and larger NBFCs.

Other Enablers: Udyam Registration

Udyam Registration, which was launched by the Ministry of Micro, Small, and Medium Enterprises (MoMSME) in 2020, helps address formalization concerns by giving MSMEs a unique identifier with their Aadhaar number, PAN number, and other relevant business details. Over 44 million MSMEs have registered their businesses.

Udyam registrations can unlock several benefits in creating data sets for induvial nano enterprises as well as aggregate data by different segments – size, industry, region etc. – to help guide any fiscal incentives or schemes by the government as part of economic policy. However, to unlock the full potential of Udyam Registration, a few strategic improvements are necessary to ensure validated and regularly updated data entry for the MSMEs as well as better integration of Udyam with public data sets such as GST, Shop & Establishments registrations, utility bills, ESI.

Driving Economic Growth with Affordable Credit

Meeting nano entrepreneurs’ credit needs through customized solutions is essential to India’s economic growth and financial inclusion. By supporting innovative financial models, using advanced underwriting technology, and enhancing regulatory frameworks like Udyam Registration, stakeholders can unlock formal credit for nano entrepreneurs. With better access to credit, these small businesses have the power to further boost local commerce, create more job opportunities, and strengthen India’s economic resilience and prosperity.