Entrepreneurship and the role of NBFCs

Deepak Aggarwal, Co-Founder and CFO of Moneyboxx Finance Ltd, discusses the impact of the two waves of the covid-19 pandemic, the industries most affected, and the need for an entrepreneurial mindset, as well as the role NBFCs should play in recovering the industry.

Deepak Aggarwal Co-Founder & CFO, Moneyboxx Finance Ltd.

The two waves of the Covid-19 pandemic have badly impacted one and all. While the technology savvy companies as well as the corporate blue-chips have managed to insulate themselves from economic downturn, most of other sectors including MSMEs and the contact sensitive sectors like hotel & restaurants; tourism; aviation ancillary services and other services that include private bus operators, car repair services, rent-a-car service providers, event/conference organizers etc have been badly impacted. The sharp rise in inflation, especially WPI has only worsened the situation.

MSMEs along with the contact sensitive sector account for the largest chunk of employment in the country. But their poor-economic condition has badly impacted the employment scenario in the country. According to the International Labour Organization’s (ILO) database – India’s unemployment rate – the share of the labour force that is without work but available for it – rose sharply to 7.11% in the pandemic year 2020 to reach the highest level in at least three decades. It seems the second Covid wave has pushed India’s unemployment rate further and the current calendar year could possibly see an even higher rate of joblessness in the country. According to the Centre for Monitoring Indian Economy’s (CMIE), the monthly unemployment rate of the country, as per CMIE, rose from 6.62% in January 2021 to 7.97% in April.

And the situation is unlikely to change in a hurry. It is to be noted that for over a decade, India’s joblessness has been more acute than its immediate neighbours, while till 2009 Sri Lanka used to have a higher rate. As such, while the pandemic may have worsened the situation, India’s jobless growth has been a problem for a while.

The scenario of entrepreneurship

With job creation a difficult nut to crack, India’s massive unemployment problem can possibly only be resolved by promoting ‘Entrepreneurship’ and encouraging MSMEs. All the developed and major developing economies including the US and China have encouraged focused entrepreneurship and innovation by individuals, which also helped them mitigate some of the problems faced by the people on a day to day issue basis. In fact, entrepreneurship now qualifies as the life-blood of economic growth in modern economies, looking to replicate the success of the most developed countries.

India too is ripe with talent for entrepreneurship. Apart from major cities even the tier 2 & 3 have emerged as a hub of entrepreneurship with many start-ups creating innovative solutions. But till date, only a handful of start-ups have been able to scale up. In other words, in India innovations very seldom get converted into productive entrepreneurship. The biggest problem that entrepreneurship is confronted in India is ‘lack of capital’.

While state policy pushed public banks into ramping up lending activity in rural areas, mostly directed towards base agriculture, entrepreneurship and labour in activities in urban and suburban areas remained underfunded relative to demand. Conventional Banking would deem such local innovation as a proposition which is too risky for their loans books.

The role of NBFCs

This is where NBFCs enter the market. They have taken a leading role in providing innovative financial services to Micro, Small, and Medium Enterprises (MSMEs), most suitable to their needs, while the traditional banks have been largely reluctant. They have often taken a lead role in deepening the penetration of these under-served segments and going after the “missing middle”, NBFCs enable capital allocation towards underserved parts of the economy. The effect of credit provision to underserved parts of the economy has an exponential effect on growth, encouraging entrepreneurship as productive activity is compounded through rising rewards and compensation for innovation.

In addition to capital, NBFCs can provide technical advice and expertise on cash and capital management, which significantly reduces the barrier of financial literacy that would prevent people in such areas from availing credit. As NBFCs educate prospective entrepreneurs on how finances can be arranged and structured more efficiently, the quality of the loan assets created also improves, building confidence in this particular market that enables more borrowing and lending.

To conclude, the supply of credit facilitated by NBFCs creates an ecosystem of rising returns to the factors of production and productivity, while also supplementing this growth with technical expertise and knowledge on the financial and management side, boosting prospects for entrepreneurship, which is after all the lifeblood of economic growth.

The author of the blog is Deepak Aggarwal, CoFounder and CFO, Moneyboxx Finance Ltd

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