Technologies | Resources
Sustainable Livelihoods and Micro
Achla Savyasaachi, November 1998
With almost 80 per cent of the Indian
population fighting for survival everyday, it is of utmost importance to identify new ways
and means to provide resources they need to better their lives. Grant or subsidies are far
too small in macro-economic terms to do much in the face of the vastness of the problem.
There is a need to identify ways to encourage survivors rather than creating helpless
dependents. This necessitates a basic change in the mindset of both givers and takers.
One sustainable way of dealing with the situation is to create
sustainable livelihoods. Government agencies and the formal sector clearly cannot absorb
the entire workforce. In this scenario, there is a need to promote entrepreneurship in the
In 1993, a United Nations Development Programme workshop took place in
Delhi, in collaboration with the World Business Council for Sustainable Development on
Micro and Small Enterprises and Eco-friendly Technology. At this workshop, World Business
Council for Sustainable Development, International Development Research Centre, Canada and
Development Alternatives, New Delhi spelt out and demonstrated the micro/small enterprises
and sustainable development linkages based on experiences of FUNDES, an institution to
promote micro enterprises based in Latin America, and TARA - the micro enterprises arm of
Development Alternatives. The workshop recommended that steps be taken to create an
institutional mechanism in India to provide finances and support services to
technology-based micro/small enterprises for promoting sustainable livelihoods and
providing income-generating opportunities.
Any enterprise, whether in the formal or informal sector, needs
financial resources for working capital and investment purposes. As far as the formal
sector is concerned, it is well serviced by various commercial banks and other financial
Informal units operate under conditions of extreme shortage of all
types of resources. These include a poor endowment of fixed capital and working capital.
The qualitative and quantitative limitations in terms of having access to outdated
technologies, lead to a low level of productivity and extremely high cost. The low level
of working capital will force small producers to buy inputs in small quantity. This will
result in considerable loss of time, interruption and lack of continuity in production
processes. The shortage of funds also makes it difficult to even keep minimum inventories
and explore more favourable market options.
During the year 1997-98, out of the total net bank credit of Rs
2,18,219 crores by public sector banks, only 18 per cent i.e. Rs 38,109 crores has been
disbursed to the small scale sector. The tiny sector has been given Rs 9,515 crores out of
Rs 38,109 crores. It clearly indicates that the various credit institutions which are
working to channel credit to help people establish small or micro enterprises including
national development banks, commercial banks, rural banks and co-operative banks allocate
a very small portion of their portfolio for the informal sector. Nationalised banks and
formal credit institutions are not attuned to deal with this section of the society
requiring small loans and having no collateral security to offer. The cultural gap between
the institutions and the community that needs to be bridged is wide. These institutions
are more accustomed to dealing with the more confident, literate borrower of urban areas.
Credit is a powerful development tool. Institutional credit can make it
- finance simple technological improvements and consequently attain
greater productivity, and
- provide the necessary working capital to improve quality, timely
availability and cost of inputs as well as to find market opportunities.
But like any tool, its effectiveness depends on how it is used. Any
credit programme must be designed keeping in mind the needs, aspirations, skills and the
social, economic, cultural and political system of the population to be served. The most
important element of any credit institution to work with the informal sector, is to
demonstrate that the credit to the informal sector is financially viable.
Formal financial institutions cover their credit risks and profit from
a mix in their loan portfolio. Adding small producers to the portfolio would increase the
credit risk. Further, it generally costs more to administer a portfolio split up into very
small loans than a theme involving only a few large customers. Traditional banking
practice tends to give much weight to a portfolio involving large customers who can
provide guarantees when considering an application for credit but sufficient attention is
not always paid to the analysis of factors affecting the risk of default i.e. lack of
non-financial support services.
This has a number of important implications. Formal financial
institutions prefer to finance a customer with sufficient assets that can be pledged as
security. Secondly, these institutions consider recovery of their portfolio as the only
major factor to be taken into account. They are not determining the composition of the
portfolio according to the needs of the financial resources of the informal sector. They
also have a very high operating cost.
In this scenario, credit though important, cannot by itself resolve all
of the structural and functional problems. Credit is a condition that is necessary though
it is not sufficient for the development and transformation of small-scale informal
Small producers, who traditionally have no access to institutional
credit, have greater needs for training and technical assistance as well. Therefore, it is
becoming increasingly important for the lending agency to work in association with, or in
coordination with, promotional agencies specialising in training and technical assistance
for informal activities.
At the same time, it is important to find ways to make the financial
operations attractive and profitable in funding small scale operations to attract the
inflow of funds in the lending agency. To be able to meet the credit needs of a small,
informal unit, financial intermediaries have to reduce the relatively high operating
costs, increase revenue, reduce risks and undertake organizational adaptation.
It is of utmost importance, therefore, to have an efficient and
competent promotion agency with experience or capability of quickly adapting to the
circumstances. It also requires a financial intermediary that agrees to adjust
requirements, criteria and procedures, without sacrificing financial viability.
One of the most significant global changes in the 1990s is the
increasing use of public-private partnership approaches to finance infrastructure
development and in other areas with the assumption that the benefits of such partnerships
would trickle down in the system and would create better living conditions.
The 1993 UNDP Workshop emphasised the need to create an institutional
mechanism at a micro level which should be flexible, low in cost and simple in procedure
for providing finances and rendering support services at close proximity to the borrower.
As a result of the efforts for promoting an innovative mechanism for
providing finance and support services to Micro Small Entrepreneurs (MSEs), two corporate
entities have been recently established in India. Indian Micro Enterprises Development
Foundation (IMEDF), incorporated in 1996 under Section 25 of the Companies Act, 1956 as a
not-for-profit organization, and Indian Micro Enterprises Development Finance Corporation
Limited (IMEDFIN) incorporated in 1997 as a for-profit entity.
The Foundation will help in creating an enabling environment for micro
and small enterprises. The Foundation will provide support services to Micro Small
Entrepreneurs (MSEs) and Micro Credit Finance Institutions in the NGO Sector; and the
Finance Corporation will provide credit to the MSE sector using innovative financial
instrumentalities (including venture capital financing).
The working of the Foundation and the Corporation together is an
initiative towards developing a model of an innovative mechanism in India to cater to that
class of people who are otherwise excluded from the formal credit system because of their
lack of material collateral. The joint effort will also provide support service input to
promote sustainable enterprises.
The financial package offered by the Finance Corporation has features
such as close proximity, quick and uncomplicated disbursement of credit, credit
sanctioning on the basis of actual requirements, suitable credit duration and repayment
modalities and credit disbursement to be linked with non-financial support services.
In the formal sector, two common sources of failure of development
financial intermediaries are imperfect information and imperfect enforcement. The
Foundation and the Corporation have plans to tackle this gap in a strategic way by setting
up an information centre to have a strong database.
For the purpose of the Corporation and the Foundation, micro and small
enterprises have been defined to include those enterprises which have a total investment
in plant and equipment ranging from Rs 10,000 to Rs 10 lakhs and from Rs 10 lakhs to Rs 1
crore, respectively and whose operations/outputs are eco-friendly and technology-based
with inputs of market-driven indigenous or imported technology.
The geographic target initially will be the Delhi National Capital
Region, followed by the Bombay-Pune region. The following sectors will be targeted
- Ancillary industry related to engineering, automotive, food
processing and pharmaceutical sectors
- Information technology (hardware, software and services)
- Service sector
- Location-specific industries such as the glass industry in Firozabad, pottery industry
in Khurja, leather industry in Agra and brass industry in Moradabad
- Distribution industry
The Foundation will provide support service in the following areas:
- Market/feasibility, studies
- Technology acquisition
- Skill development
- Identification of supplier
- Facilitating access to information
- Credit rating of micro and small enterprises
- Catalysing horizontal and vertical linkages of MSEs with big
business, finance institutions, and integration with global markets.
The Foundation will also provide support services to Micro Credit
Finance Institutions (MCFIS) through strategic alliances with appropriate private and
public sector agencies and NGOs, and engage itself in capacity and skill development of
MCFIS to enhance their capabilities for adequate and sustainable supply of micro and small
enterprises. Support services to MCFIS would be as follows:
- Innovations in micro credit finance technologies, systems, and
- Development methodologies and systems for monitoring flow and end-use
of funds of micro credit finance institutions
- Designing performance criteria for micro credit finance institutions
- Development methodologies for credit rating of micro credit finance
- Facilitate replication of best practices and innovative financial
technologies by developing borrower-friendly process documentation
The strategies adopted by the Finance Corporation and the Foundation to
ensure regular flow of funds, on a sustainable basis, focus upon strengthening a new
business relationship between the private sector and the informal financial
intermediaries, by providing viable investment opportunities in a huge untapped market.
Technologies | Resources