Harnessing technology for Credit Dispensation: Transforming the Unorganized Sector

Small business or to be very specific unorganized small business is the economic foundation of India. It is perhaps one of the largest disaggregated business ecosystems in the world sustaining around 50 crore lives.The sector comprises of countless of small manufacturing units, shopkeepers, fruits / vegetable vendors, truck & taxi operators, food-service units, repair shops, machine operators, small industries, artisans, food processors, street vendors and many others.

Formal or institutional architecture has not been able to reach out to them to meet the financial requirements of this sector. They are largely self financed or rely on personal networks or moneylenders. Addressing this need will give a big boost to the economy otherwise this segment would remain unfunded and a portion of the productive labour force would remain unemployed.

The unorganized Small Business Sector accounts for a large share of industrial units. They feed large local and international value chains as well as domestic consumer markets as suppliers, manufacturers, contractors, distributors, retailers and service providers. The gross value addition of this sector is 6.28 lakh crore annually.Mainstreaming these enterprises will not only help in improving the quality of life of these entrepreneurs but will also contribute substantially to job creation in the economy thereby achieving higher GDP growth.

The biggest bottleneck to the growth of entrepreneurship in the small business is lack of financial support to this sector. The support from the Banks to this sector is meagre, with less than 15% of bank credit going to Micro, Small and Medium Enterprises (MSMEs).A vast part of the non-corporate sector operates as unregistered enterprises. They do not maintain proper Books of Accounts and are not formally covered under taxation areas. Therefore, the banks find it difficult to lend to them. Majority of this sector does not access outside sources of finance.

Micro Finance is an economic development tool whose objective is to provide income generating opportunities to the people at the bottom of the pyramid. It covers a range of services which include, in addition to the provision of credit, many other credits plus services, financial literacy and other social support services.Not just in India, the informal economy is a major concern for the whole world. The only good news is digitisation is helping India march forward rapidly but a lot needs to be achieved.

Leap of Faith

In a brief span of 8 years, PMMY/ MUDRA has brought forth a Leap of Faith inculcating robust credit dispensation among Banks while fostering superior credit culture among diversified credit seeker groups, mainly from the bottom strata that had remained unserved for a long tenor, thus being an efficient vector for ‘uniform credit at population scale’!

Having successfully weathered the pandemic blunt in both disbursal as also number of accounts, MUDRA now appears destined for higher glories benefitting the social fabric of the country through bringing financial freedom to fringe groups of Women, Minorities, SCs, STs, OBCs as also fuelling new age entrepreneurship across manufacturing/services/trade

• Average ticket size of the loans have nearly doubled; ~Rs 72,000 in FY23 from ~Rs 38,000 in FY16
• Shishu is the mostly widely availed Mudra product across all Social Segments except Mudra Card, where number of accounts is evenly distributed with major focus towards Kishore product
• With regard to disbursements, highest disbursement is in Shishu product in the hitherto fringe social segments of SC, ST, OBC, Women etc. Disbursements to Minorities are higher in Kishore Product than Tarun product
• Entrepreneurs such as New Entrepreneurs and Mudra Card owners have availed most disbursement under Tarun product and least under Shishu product

Unfortunately, even after implementation of MUDRA there is huge gap between demand and supply of credit in present scenario.  There could be millions of people those who are still looking for credit but since they belong to the informal economy they are not lucky. According to a report by Avendus, only 15% of MSMEs out of the total 64 million have access to credit.

Being Formal

One of the major case studies of the formalisation is Goods and Services Tax (GST). The one nation, one tax data has become an integral part of the economy. The number of GST payers has also increased from 70 lakh in 2017 to 1.40 crore in 2022. While GST is helping the government with big revenues, new enterprises are also getting exposed to the financial world. This is actually helping them to build their credit score.

Along with the GST, the spread of digital, specifically in the finance domain, has revamped the legacy infrastructures. This is making a big difference for people, who have struggled hard going from counter to counter and negotiating huge paperwork to get some subsidy.Under the direct benefit transfer, 47 crore beneficiaries are registered under various 180 schemes, and during the pandemic government transferred Rs 1.41 lakh crore to them. From vaccination to admission, a robust system is being built with the support of digital infrastructure.

New Economic Indicators

Along with the established high-frequency economic indicators, new metrics have emerged to understand the state of the economy. From how many people are getting tap water facilities to how many of them are using LPG cylinders, there are new ways to gauge the economy. Similarly, the electricity meter reading and the railway passenger traffic data show the consumption story. Apart from the EPFO, various private websites are showcasing the real picture of the job market. Along with the sale of vegetables, the data on organic food is also being taken into consideration. Apart from this, economists are also looking at UPI, Bharat Bill Payment System, National Electronic Toll collection and online verification data to get the pulse of the digital economy. How many new bank accounts are opened and how many people are buying insurance or renewing it? Banks are also sharing the growth of numbers from their digital initiatives such as payment and digital lending including BNPL. Telcos can share how many people are using smartphones and how much data they are consuming. In a granular manner, Google can also offer data points on what people are watching, searching and where they are spending and shopping. Adding to that, Swiggy and Zomato are delivering the food data.

Such new indicators are also covering a lot of people who were not part of the system. India is adding digital tools one after the other and the business models are getting rebuilt.

Unorganised segments

To bring everyone into the system, the labour ministry has launched e-Shram, a portal which is a central database for unorganised workers. It tracks the major five sectors. Out of them, agri has the highest number at 1.96 crore registrations. Construction has 1.18 crore and apparel 94 thousand registrations, which are seeded all through Aadhaar.

What is needed?

While the digital system is robust and with interoperability, users and beneficiaries are getting tracked is quite remarkable. But tracking their data and helping them get benefits are two different things. The majority of the financial institutions are still focusing heavily on urban and the same set of borrowers. But the people at large in small villages are still struggling to get loans to buy a bike or open a shop. Having more data will certainly help lenders in taking decisions but what about the large population which is new to credit? India’s credit-to-GDP ratio is still very low. And more importantly what about the basic wage hikes for the people working in the unorganised sector? There are various data points which suggest that wage hikes are stagnant.

By leveraging technology, financial institutions and fintech companies can reach a wider pool of individuals in the unorganized sector, enabling them to access affordable and timely credit. The use of digital platforms, mobile applications, and alternative data sources allows for efficient evaluation of creditworthiness, reducing the reliance on traditional collateral-based assessments.

Overall, the transformation of the unorganized sector through technology-enabled credit dispensation has the potential to unlock opportunities, foster inclusive growth, and uplift the livelihoods of individuals. It requires a collaborative effort from various stakeholders to create an enabling environment that fosters innovation, supports digital infrastructure development, and promotes financial literacy. By doing so, we can truly harness the power of technology to drive positive change and empower the unorganized sector in our economy.A lot of work needs to be done here on not just tracking their work but bringing them under the social safety net. That’s when perhaps more people will be able to get credit.