Women entrepreneurs and access to finance: why credit stays small

By Preethi Rao

Credit and financing for MSMEs: According to a study by the International Finance Corporation (IFC), women-owned businesses in India face a funding gap of around 70 percent, and much of this gap can be attributed to ingrained social biases in the financial system. Women are often over-represented in traditional sectors such as garment manufacturing and typically run businesses from home, resulting in low revenue and potential for growth.

Data from the 73rd NSS round shows that while male and female entrepreneurs access credit in similar proportions across all income categories, the amounts of credit available to female entrepreneurs are significantly lower (more than 50 percent below the amounts of credit accessed by their male counterparts be retrieved).

On the supply side, women entrepreneurs lack suitable products to meet their needs, and procedural requirements such as the need for collateral and credit scores can limit access to finance. On the demand side, poor accounting and financial management skills, poor credit ratings and poor financial literacy, among others, can prevent women from accessing formal financial services.

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For women-run micro-enterprises, the Pradhan Mantri Mudra yojana (PMMY) has been one of the important programs aimed at facilitating easy access to institutional credit for women. However, women borrowers accounted for just 41 percent of all credit sanctioned in 2018-19, and this was in the Shishu Category ie loan amount of around Rs 50,000. These numbers indicate the small loan sizes that women access.

Additionally, most women entrepreneurs typically rely on their own savings, loans from family and friends, or microcredit to fund their business needs. the 6th India Economic Census data shows that the source of funding for 79 percent of women-owned businesses is their own equity, as banks and other financial institutions are unsure of their business models and the potential or guaranteed returns on loans.

The Value for Women Report highlights that the nature of the business conducted by banks, where lending criteria and customer acquisition processes may not take into account the unique needs of women, results in the exclusion of many women entrepreneurs. This aspect, coupled with embedded social norms that dictate that most titles of family wealth be held in the names of men rather than women in the family, discourages women entrepreneurs from using them as collateral.

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Furthermore, these challenges manifest themselves in different ways. For example, women entrepreneurs are charged a higher interest rate on loans once they are approved. Even if all other observable criteria are the same, women entrepreneurs are 30 percent more likely to need a guarantor. In addition, male-owned companies generally raise more formal and informal venture capital compared to female-owned companies. Microfinance loans and loans through collectives or self-help groups are the most common forms of access to financial support for women entrepreneurs.

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There are many ways that financial institutions can adopt inclusive practices while catering to women entrepreneurs. For example, alternative credit rating options can replace collateral requirements, giving women access to formal credit and/or better credit terms. These can take the form of utilizing trading history from digital platforms or compiling a score based on cash flow analysis, household income and behavioral data. As gender investing gains momentum, the implicit propensity to invest can be addressed through a two-pronged approach – raising investor awareness of gender aspects of barriers to accessing finance and building the capacity of women entrepreneurs to pitch their business ideas and funding needs.

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A variety of financial products (term loans, working capital, etc.) are required to service the women-run business at different stages and for different needs. In addition, credit conditions must be adapted to their ability to repay (e.g. daily repayments, sachet loans, etc.). Blended finance mechanisms can help provide access to finance at subsidized interest rates. Some proposed solutions include – donors/philanthropic organizations offering a first loss guarantee, a combination of seed capital and debt at a lower interest rate, and a “missing rate” guarantee (like the moratorium extended during the pandemic) to deal with natural disasters or other such emergencies.

In summary, through innovative approaches and greater institutional support, there is scope to significantly reduce the credit gap that exists in the female entrepreneurship segment in India.

Preethi Rao is Associate Director at Krea University’s LEAD Research Center.


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