Promoting Rural micro Enterprises through Value Chain Finance in India 310309
Promoting Rural micro Enterprises through Value Chain Finance in India
Micro enterprises have potential to eradicate poverty. Such enterprises provide sustainable
income to the poor and marginalized families. However, it is not easy for a poor family/family
member (s) to own a micro Enterprise. Poor families need access to range of services to be able
to start or strengthen a micro Enterprise.
Access to credit is one of the most critical inputs to start or sustain a micro Enterprise.
Traditionally, money lenders and traders have been providing credit services. In many
instances, poor families were victim of exploitative informal credit services. This led to focus on
formal credit. Some of the past efforts towards enhancing access to formal credit include
promotion of Cooperative Credit Structure, Nationalization of Banks with focus on priority
sector lending, formation of NABARD as apex Bank and promotion of Regional Rural Banks. In
the last several years, there has also been emergence micro Finance sector. This includes linking
Self Help Groups (SHGs) to Banks and credit through micro Finance Institutions. In most of
these initiatives, Government has played a key role in promoting the networks, capacity
building, subsidizing the loan/interest or finally waiving the loans. Civil Society Organizations
(CSOs) have also put in effort in promoting micro Finance sector in India.
Despite enormous efforts relating to formal credit services in India, there has not been
substantial progress in providing credit services to micro Enterprises. Most of the micro
Enterprises access capital either from own source, friends/relatives, traders or money lenders.
In this context, it would be important to understand the past/on going efforts relating to credit
services for micro Enterprises.
Cooperative credit structure has always focused on providing working capital credit, (in shape
of term loans) for agriculture production. Banks including Regional Rural Banks generally
provide credit under priority sector lending. This is linked to Government self employment
schemes like earlier Integrated Rural Development Project (IRDP) and now Swarnajayanti
Gram Swarojgar Yojana (SGSY). While Cooperatives focus on agriculture production credit,
Banks (linking to Government schemes) focus on agriculture allied activities like dairy, goat
rearing and poultry. While delivering credit through microfinance, there has always emphasis
on access to credit THAN on purpose of credit. In case of microfinance, credit services mainly in
shape of term loan supports in managing household cash flow. Most of the past initiatives have
not focused on providing credit services to micro Enterprises.
Micro enterprises could be small scale processing activities relating to agriculture and allied
activities; artisan based activities; production of handloom or handicrafts. Petty shops and small
businesses including trading activities can also be referred to as micro Enterprises. It is
observed that, most of the micro Enterprises in rural areas either relate to natural resource
linked production base or skill. Generally, micro Enterprises relate specific value chains. Value
chain refers to actors, activities, enterprises and Business Development Services providers
associated with production to final consumption of a produce/product.
Vrutti Livelihoods Resource Centre, Catalyst Group,
19, 1st Main, 1st Cross, Ashwathnagar, RMV 2nd Stage, Bangalore 560 094 India
Like any other enterprises, micro Enterprises need credit for different purposes. This could be
for investment and/or for working capital. Experience shows that, it is quite challenging to
deliver credit services to micro Enterprises. Unlike other enterprises, usually micro enterprises
do not have strong asset base NOR do the entrepreneurs have margin money to be able to
access mainstream formal credit. In case of micro Enterprises, the need for credit may be quite
different like for training and marketing the produce on credit basis (not on cash). Micro
enterprises do not have a business plan NOR do they have proper accounts/history of banking
transaction to so proof of credit worthiness. Often micro Enterprises are integrated with the
household economy, and hence the credit needs of micro Enterprises need to be seen along with
other household credit (that include expenses on health, education and marriage) needs.
There is need for new products and approaches in delivering credit services to micro
Enterprises. Existing formal institutions like Banks and micro Finance Institutions may find it
difficult to address the credit need of micro Enterprises. Considering higher amount of credit
(amount per micro Enterprise) and need for flexibility in delivery of credit, it may also be
beyond the capacity of Self Help Groups to provide credit services to micro Enterprises. In this
context, Value Chain Finance can be a promising approach to deliver credit services to micro
Value Chain Finance refers to provision of credit by higher level value chain player (buyer or
trader) to sellers like small scale trader, processors, producers and collectors. Traditionally,
value chain finance is being provided by traders. In most agriculture and allied value chains
(that relates to majority of micro Enterprises), local traders provide credit to the small scale
processors and producers/collectors. Often such credit services are intertwined with purchase
of produces. Such traditional value chain finance is generally criticised for its exploitative
practices. However, close look at the traditional value chain finance would reveal that such
services are need-based, quite flexible and timely meeting the needs of micro Entrepreneurs.
Over the years, there has been decline in exploitative practices relating to trade finance by local
traders. This is mainly due to increase in awareness and access to market information at
Meanwhile, globalization has also promoted competition among major corporate entities. To
enhance competitiveness, large private companies are keen on linking with village based micro
Enterprises to directly procure rural produces/products. In this case, credit in shape of value
chain finance can play a critical role for facilitating such linkages.
It seems value chain finance can play vital role in promoting micro Enterprises. Based on
learning from traditional value chain finance and the need of corporate entities (relating to
procurement, credit/market linkage with micro Enterprises), it is possible to promote value
chain finance addressing the credit need of micro Enterprises in India. This may further require
development of new institutional framework, promotion of new institutions and designing new
credit products for micro Enterprises.