Finance Partners

As ownership of the means of production was a key element of the SELCO Foundation’s strategy for improving livelihoods, financing the purchase of devices played an important role in any intervention. Therefore, encouraging the financial sector to back devices became a priority.

The Indian banking system operated under a fair amount of government control. Most of the banking sector had been nationalized from 1969-80 and while in the 1990s, laws stimulating private banks were passed, the state still held considerable equity in financial institutions and had used its authority to pursue policy goals.  To spur rural development in 1975, the Indian national government created Regional Rural Banks (RRBs) across the country. These banks were jointly owned by the national government, by the respective state government in which they were located, and a sponsored national bank. RRBs had been given the mandate to serve rural areas with basic banking and financial services, utilizing small branches in rural villages.  Small, private rural co-operative banks also flourished in the country, providing another source of financing. While RRBs and co-op banks had a rural mandate, the organizations still operated under credit policies designed to ensure the soundness of loan portfolios.

The national government added other mechanisms to help finance rural microenterprises. Under the Aatmanirbhar Bharat Abhiyan (Self-reliant India Campaign), an initiative was launched in 2020 to boost microenterprises in the unorganized segment of the food processing industry – an industry that dominated SF’s livelihood promotion efforts. The initiative provided subsidies for capital equipment, seed capital for small enterprises, and grants for training.

While robust, the financial ecosystem for rural development was unequally situated across India. Especially in the Northeast, branches of RRBs and cooperative banks were thinly spread. In these areas, inhabitants of rural areas were unlikely to have an existing relationship with a financial institution, reducing the possibility of gaining credit.

To make financing possible, SF and its community partners utilized three basic levers to get financial institutions in the Northeast to support their livelihood initiatives. The first was increasing the familiarity of bankers with their potential rural clientele and the efficacy of new production techniques. The second was to work with the government and private funders to de-risk loans, making them more attractive to the financial institutions. Finally, SF worked with banks and users to create terms that would allow microenterprises to flourish.

Building familiarity within the banking community was an ongoing priority. SF conducted banker training programs and sponsored visits to rural villages outside the usual territory of most loan officers. The key for SF was identifying banking champions who took the lead in providing financing and promoting microenterprises. SF found there was no better advocate to bankers than another banker.

SF had a number of options to help de-risk loans to make them more appealing to bank lending officers. The Foundation could marshal private money to provide loan guarantees to encourage bankers. SF also could work with government officials to unlock agricultural subsidies.

Most importantly, SF served as a go-between for the banks and microenterprises. If bank loans were slow to materialize or initially inadequate, SF could provide short-term gap financing, allowing the microenterprises to become operational. In addition, the Foundation helped financial institutions tailor repayment schemes to fit with rural cash flows. Bankers needed to understand that rural budgeting worked on a cash basis that might not coincide with the typical repayment cycle. Farmers benefited when loan terms considered harvest cycles. Other microenterprises required more frequent and smaller repayments according to when they received money for their goods or services.

Beyond direct interaction with bankers, aligning the financing system required ensuring that other elements of the ecosystem were in place. A SF staffer noted that even when bankers understood the technology and trusted the artisans, they needed to be certain of the feasibility of the enterprise.  As one SF staffer notes, “The banker will say ‘Even if you can produce more, where are you going to sell it? If there's no one who's going to buy in that remote area, your business is not viable for me."

All in all, SF reported that their interactions with bankers was challenging but positive. “There's no active resistance from the banks,” one SF staffer reported. Both the microenterprises and the bankers were ultimately aligned in terms of incentives. Microenterprises needed financing and the bankers wanted to build their local loan portfolios to deliver on their mandates to aid rural development. Once connections were made and loans were being repaid, bankers were eager to add more of the same. For example, when MOSONiE Foundation started setting up electrified weaving operations, gaining financing was a major obstacle. But once the first weaving enterprises were running and paying back their loans, bankers were actively soliciting more business.