RESPONSIBLE FINANCE:
OPPORTUNITIES IN THE MSME SECTOR
Responsible Enterprise Finance Project
GIZ
May 2014
What is Responsible Finance?
• As India moves towards propelling its economy back on
course, it is important to acknowledge the role of the
financial sector.
• The importance of environment, society, governance
and transparency (ESG) as determinants of sustainable
growth cannot be over emphasized either.
• These factors also become immediately relevant for
financial institutions as they become directly or
indirectly involved in financing projects, and can have
influence across sectors, industries and communities.
Responsible Finance
Why is Responsible Finance important
for MSMEs?
Big Companies
Individual impact and contribution to
the economy
Contributes to 45 per cent of the
industrial output, 40 per cent of
exports
MSMEs
Provides employment to more than
60 million people and creates as many
as 10 lakh jobs each year.
Produces more than 8,000 different
products annually
Some relevant
developments
• Regulatory landscape
• Development organisations/ DFIs
The regulatory landscape
RBI Nachiket Mor Committee’s
Vision Statements
Business Responsibility Reports
• Sufficient Access to Affordable
Formal Credit
• Universal Access to a Range of
Deposit and Investment
Products at Reasonable Charges
• Universal Access to a Range of
Insurance and Risk
Management Products at
Reasonable Charges
• Right to Suitability
• In 2012, SEBI mandated the
reporting of performance of the
top 100 listed companies on the
National Voluntary Guidelines
in the form of Annual Business
Responsibility Reports
• The BRRs contain information
not only about the company’s
own performance, but also that
of their supply chain which
typically consist of MSMEs
SEBI Alternative Investment
Fund Regulations
• Released in 2012, SEBI details
the definition of AIFs in India:
• Any fund established or
incorporated in India in the
form of a trust or a company
or a limited liability
partnership or a body
corporate which is a privately
pooled investment vehicle
which collects funds from
investors, whether Indian or
foreign, for investing it in
accordance with a defined
investment policy for the
benefit of its investors
DFIs| Energy-efficiency Financing
With the establishment of the Bureau of Energy Efficiency in 2002,
the Indian Government took the initiative to promote Energy
Efficiency within the Indian economy. Efforts towards promoting
Energy Efficiency among MSMEs are still at a nascent stage. The
following are a few lines of credit:
Examples of lines of credit:
• Since 2009, SIDBI has been running focused lending schemes through a dedicated
“Energy Efficiency Cell” under bilateral lines of credit from KfW, JICA, AfD and the
World Bank. So far, at least 6,000 MSMEs have benefitted from Rs.3,000 crore (€422
million) in loans dedicated for investments in clean production and energy efficient
technologies.
• State Bank of India, the country’s largest bank, has developed an energy efficiency
credit product with the support of GIZ and SIDBI. It is likely to be rolled out soon
across all bank branches and has the potential of reaching some 6 million MSMEs.
DFIs| Impact Investments
In India, over 100 impact investments worth Rs.2,100 crore (€395
million) have been made so far in funding to innovative enterprises
serving the needs of the poor and providing solutions in sectors
such as education, sustainable agriculture and health.
Examples of lines of credit:
• The Samridhi Fund, operated by SIDBI with
investments from DfID, will make impact
investments of Rs.336 crore (€47 million) in social
enterprises operating in India’s low-income states.
• The India Opportunities Fund, managed by SIDBI on
behalf of the Indian government, is the first in a
series of funds that will provide Rs.5,000 crore
(€703 million) in capital to innovative MSMEs over a
ten year period.
Focus on sectors
such as:
• Health
• Education
• Water and
Sanitation
• Rural
Development
• Women
Empowerment
Innovative Debt-Finance
IFMR Capital:
• Provides low cost refinance to local financial institutions so that they
can in turn serve microenterprises – very similar to the role a District
Credit Cooperative Bank may play in the life of Primary Agricultural
Credit Society.
Specialised Venture
Debt Funds:
• These include Intellegrow (http://intellegrow.com) and Caspian
(http://www.caspian.in) that provide debt funds to Small Enterprises
though perhaps not to microenterprises per se.
Local Full-Service
Financial Institutions:
Specialised SME
lenders:
• These include Cooperative Banks, Regional Rural Banks, and the
Kshetriya Gramin Financial Services (KGFS) companies promoted by
IFMR Trust. These institutions have the capacity to fund a mix of micro
and small enterprises in both rural and urban areas.
• These include non-bank companies like Vistaar Finance
(www.vistaarlfi.com) and AU Finance (www.aufin.in) who have
developed specialised approaches to assess small enterprise
cashflows and manage collateral.
GIZ | The Responsible Enterprise
Finance Project
GIZ and SIDBI have come together under the Responsible Enterprise Finance
Project to explore activities and make strategic interventions under the
following four buckets:
• Environmental
and Social Risk
Management
Framework in
MSME
Financing
• Innovative
Products and
Services for
Energy
Efficiency
Financing
• Risk Capital for
Social
Enterprises
that target
underserved
markets
• Voluntary
Principles and
Self-Regulation
for the
financial sector
Environmental and Social Risk Management
Framework in MSME Financing
Financial sector side
• The Project aims to:
– Create a standardised ESG
risk management framework
for financial institutions to
measure risk before financing
MSMEs
– Build capacities of credit- risk
officers of FIs
– Open dialogue with
regulators for some
development of regulation in
this regard
MSME side
• Need for MSMEs to start
taking their environmental,
social and governance (ESG)
impacts into account
• Challenges:
– General low adoption of
regulatory requirements by
MSMEs
– Often, day-to-day survival
struggles tend to put ESG
concerns secondary
Innovative Products and Services for Energy
Efficiency Financing (EEF)
Financial Sector Side
• The Project aims to:
– Develop and pilot some innovative
financial products to promote and
incentivise energy efficiency in
MSMEs
– Have FIs recognise EEF as a new
stream of revenue and a distinct
product
• Challenges:
– Lack of refinancing makes smallscale banks more risk-averse.
– Some banks face difficulty in
coping with general loan demand
from MSMES but don’t anticipate
demand from EEF products
MSME Side
• MSMEs need to recognise the
long-term benefits of and
business case for energy
efficiency
• Challenges:
– Lack of knowledge amongst
MSMEs regarding
measurements like NPV, etc.
– Lack of demand for financial
products from the MSME side
– Lack of domain experts who
understand MSMEs processes
and the financial side alike
Risk Capital for Social Enterprises that target
underserved markets
Financial Sector Side
• The Project aims at:
– Mobilising innovative
financial instruments for
social business financing
– Policy advocacy with:
• India Inclusive Innovation
Fund (IIIF) for supporting
non-technology social
enterprises
MSME Side
• MSMEs which can be
classified as social
businesses need to be made
investor-ready.
• Needed: Development of an
enabling environment for social
businesses to operate easier
Voluntary Principles and Self-Regulation for the
financial sector
Financial Sector Side
MSME Side
• The Project aims to
mainstream responsible
business conduct (especially
among MSMEs) by working
with key constituency, which
is, the financial sector and
developing ESG guidelines for
more responsible lending and
investment decisions
• Challenges
• MSMEs need to work
towards becoming more
sustainable in terms of
environmental
performance, employee
health and safety and other
such factors
– Perceived lack of incentive to
adopt the guidelines
Overall challenges
• Lack of capital
• Lack of systems within
• Lack of awareness amongs MSMEs