Balmukund Saigal hails from a remote village in Punjab. He has developed a cheaper alternative to ceramic balls that are used in various industries as grinding media. Every year, he spends a few months in his hometown trying to make these balls, whose formulation only he knows, by manual labour and natural processes. After they are made, he travels to Delhi to sell them till stocks last and then again goes back to repeat the process. It’s a very good product which has a huge market. But he faces a major hindrance in scaling up — which is finance!
This is one of the innumerable stories of innovators in the rural areas of India languishing, while their counterparts in the metros race ahead to found unicorns. We’ll try to look at some of the options that are available for financing rural innovators, with the drawbacks of each as well as potential solutions.
- Local Moneylenders:
This is the most widely used road when it comes to rural financing. As innumerable movies have shown it, you go to a local zamindar or a wealthy moneylender, ask for the amount that you require, discuss a collateral and get the money almost instantaneously. It’s the easiest method because in most of the cases, no documents are required and you get the loan without many questions asked. There’s only one catch – the interest rate is too steep and the terms and conditions are decided by the lender.
For a very large number of rural folk this bypasses the need to providing documents of property and identity, which they most often do not have. But it becomes a lifelong trap where they might end up living as slaves of the moneylender. Even if they repay the loan, the rates in some remote areas are as high as 5%/month (i.e., 60% per annum). While this option is easily available to Balmukund, the interest rates would stifle any expansion plans and prevent him from scaling up.
- Cooperative Credit Societies (Patsansthas)
These are institutions that are actually made to help people become financially independent and self-sufficient by providing them initial support and guidance. Unlike banks and NBFCs, these institutions don’t focus on making huge profits but rather imparting the right attitude when it comes to finance. A lot of these societies also give interest waivers to deserving candidates. They are split into the agricultural and non-agricultural societies in the broader sense and they take care of a lot of rural financial woes. In fact, a lot of these patsansthas operate with the same objective even in the cities.
Though this can help Balmukund with better interest rates, the limitation here would be the cap on how much they can lend. These institutions have their hands tied when it comes to huge amounts and hence, they won’t necessarily be able to help Balmukund with the amount of capital he would need to invest in machinery, land, plant, labour and training. Another catch is that these societies are managed and held by a close-knit group; a lot of disbursements happen in the BPQ – Baap Pehchaan Quota
- Banks and NBFCs
Banks and NBFCs are the mostly sought-after institutions for the urban and semi-urban populace. However, when it comes to rural areas, the biggest issue is banking penetration. Most of the banks present in rural areas are either scheduled banks or co-operative banks, with very few villages actually having access to national-level banks, private or public. A lot of these scheduled/co-operative banks are controlled by local elite and the common man usually doesn’t get the benefits. In some rural areas, there are no banks available within 15-20kms and so it becomes difficult to approach the banks. Even if that is solved, there are a lot of steps to climb before you can actually do something worthwhile, such as understanding T&Cs and valuing collateral. This dissuades most of the rural population from approaching the banks.
Though the government has achieved some success in making bank access more universal through the Pradhan Mantri Jan-Dhan Yojana and other programmes we still have to walk a lot before we become sufficient in this domain. Banks can be a solution for our Balmukund if it is accessible for him, but it is a difficult journey for most of the Balmukunds out there.
- Venture Capitalists or other Financiers
These are the people who are actually sitting there for the Balmukunds of the world to turn up. They would willingly invest lakhs, if not crores like they usually do, in innovative or hatke ideas, especially those such as Balmukund’s grinding balls that have a ready market. The only catch here is that both Balmukund and Financiers are not aware of the existence of each other! This is a sad affair because we’re experiencing the start-up boom in the past decade with a lot of Unicorns added this year; and yet our Balmukund couldn’t take advantage of this.
The people who are actually making it large out of this boom are the ones studying at IITs/IIMs and other prestigious institutions. Not only are the students well-qualified, but they are also taught and groomed how to approach the VCs and pitch their ideas. They are taught whom to approach, how to approach and when to approach. It becomes a cakewalk for them to raise funds — only limited by their willingness to work hard. Just as an example, we have start-ups like Country Delight, which delivers milk to individual houses using technology to disrupt vested interests and bypass middlemen. It is a simple yet superb idea by IIM geniuses. This producer-to-table is being replicated across segments. But geniuses are not a monopoly of IITs and IIMs.
Balmukund’s innovation has the potential to shape a lot of different industries, just as those of many thousands of rural innovators. If this connect is made possible, both the VCs and the innovator would benefit, boosting rural growth by double figures.
India is not short of smart people. However, lack of certain aspects pulls them back and they can’t fly in spite of having wings. Although finance is one aspect, which we discussed in this article, there are others like education and infrastructure, which I will discuss in future articles.
The blog has been authored by Sanjay Dangi, Director, Authum Investment & Infrastructure & Financial Investor to many start-ups.
Disclaimer: The views expressed in the blog are solely of the author and TheSMEIndia.com does not necessarily subscribe to it. TheSMEIndia.com will not be responsible for any damage caused to any person/organisation directly or indirectly.