Promoting Rural micro Enterprises through Value Chain Finance in India 310309

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Promoting Rural micro Enterprises through Value Chain Finance in India 310309

  1. 1. Promoting Rural micro Enterprises through Value Chain Finance in India Jitesh Panda1 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. 1 Vrutti Livelihoods Resource Centre, Catalyst Group, 19, 1st Main, 1st Cross, Ashwathnagar, RMV 2nd Stage, Bangalore 560 094 India
  2. 2. 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 Enterprises. 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 community level. 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.

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