Financing the visibly invisible: Green and inclusive micro-enterprises in India

Tools and Initiatives

Rakesh Kumar is a micro-entrepreneur who runs a dairy business with 12 buffalos in a small hamlet in northern India. He is planning to start a biogas plant to fulfil his energy requirements and supply organic manure to local businesses nearby, but purchasing the needed machinery for the plant will require funds. He is, however, apprehensive about approaching the bank because of a previous experience when applying for a loan.

In his previous attempt to secure a loan for the expansion of his business, Kumar had to go to a public sector bank – located three kilometres from his house – to apply for and subsequently follow up on his loan application twice a week for six months. The bank's slow turnaround time was accompanied first with its hesitation to lend small amounts, followed by a long list of mandatory documents. It was such a hassle for Kumar to meet all these requirements that he decided to approach his friends for loans to start this new business.

Rakesh Kumar

Rakesh Kumar, Ladpur village in Jhajjar district, State of Haryana, India

There are some 63 million micro-enterprises in India like Kumar’s, an enormous percentage of which is situated in the rural and peri-urban areas. As per the latest definition of the Indian government, the investment in plant and machinery for these businesses does not exceed 10 million Indian rupees ($135,000 million) and their turnover is under 50 million Indian rupees. The enterprise size and subsequent requirement of finance for many of these units are often significantly smaller, yet they are often unable to access necessary funds. The financial needs of these micro-enterprises, while visible to people around them, remain invisible to financiers, rendering them visibly invisible.

Who are the visibly invisible of India’s economy?

The micro-enterprise segment comprises almost 93% of the total micro small and medium-sized enterprise (MSME) sector in India. It is responsible for generating livelihoods of over 107 million individuals in the country. About 22% of these micro-enterprises are owned and led by women. Together with small and medium enterprises, the micro units contribute to more than 30% of India’s GDP and 48% of total exports. These seemingly invisible micro-enterprises, when aggregated, contribute considerably to the country’s economy. At the same time, they are lifting millions out of poverty and bringing hope, self-reliance and entrepreneurial ambition to the most remote communities in rural India. With their business models centred on principles of resource efficiency and circular economy, micro-enterprises have the potential to help India on a low-carbon, green and inclusive path.

However, the aggregated impact of these micro-enterprises has severely caused harm to the environment they exist in. As discussed in India's sustainable finance roadmap, Country Strategy for Green Inclusive Micro Enterprises Financing, financial support for micro-enterprises is key to India's just transition to a low carbon, green and inclusive economy. Micro-enterprises contribute up to 70% of industrial pollution in India and about 13% of the annual global energy consumption. On the other hand, more than 78% of all non-agricultural MSMEs depend on informal sources to meet their credit needs. This makes their challenge of accessing affordable finance deeply rooted, impeding their efforts to adopt cleaner and more efficient technologies, hire skilled human resources and build capacities. This significantly slows their growth and profitability as well as adds to stress on natural resources.

Access to finance and environmental impact: Can sustainable finance address both?

In this day and age, where phones, watches, helmets and even toothbrushes are using smart technology, can we not become smart about finance?

The logical solution to fight the twin problems of micro-enterprises lacking access to affordable finance and causing negative environmental impact is to direct efforts towards tweaking the existing financing architecture for these units and introducing aspects of sustainable finance.

Infographic Creation Credits: Vaishali

This urgent challenge warrants a list of immediate actions. This makes it imperative for all stakeholders in the business ecosystem to come together for collective action on this shared priority with a specific call for action to ensure access to affordable sustainable finance for green and inclusive micro-enterprises in India.

Digital transformation and innovative financing models

There are a lot of ways in which systemic changes can be introduced in the financial system to accelerate sustainable financing for green and inclusive micro-enterprises. The two broad categories acting as drivers of change are digital transformation and innovative financing models.  

The use of information technology and artificial intelligence is making access to affordable finance for micro-enterprises a reality. This reduces the transaction cost and process time, paving the way for alternate credit assessment mechanisms and digital finance services.

There are also many new financing models coming up around the world that entail innovative financial instruments, mechanisms, policies and regulations driving capital flows to micro-enterprises. For example, the Hungarian government put in place the Economic Development and Innovation Operational Programme (EDIOP) to stimulate the less developed regions of the country by increasing the competitiveness of SMEs. The country’s finance minister recognized the economic role of these small businesses in sustaining the leading position of Hungary in the European Union. In June 2020, the Hungarian parliament also passed a law confirming climate-neutrality by 2050.

Hungary’s EDIOP aims to stimulate greener business models to accelerate the country’s transition to a greener path. It also stimulates the use of financial instruments to increase the up-take of energy efficiency in addition to the other objectives. As part of the country’s Climate and Environmental Protection Action Plan published in the beginning of 2020, the Hungarian government decided to incentivize the use of energy efficient business choices by pledging to provide 32 billion forints, or 92.8 million euros, if the SMEs fully or even partially decided to replace their existing energy supply with renewables which were locally available.  

Another innovative model relevant for micro-enterprises in India is community-led financing, which is based on the creation of locally financed credit mechanisms, allowing consumers and individuals in the community to identify, address, propose and fund ways to tackle issues. Innovative models like this play an effective role in persuading organizations to transition to green and inclusive finance methods.

As the priorities of the Government of India are aimed at encouraging a transition to a sustainable economy, financial support to micro-enterprises should top the list. An integrated approach is what is now needed to drive systemic change by bringing policymakers, regulators, public and private financial intermediaries together.


This blog is based on Country Strategy for Green Inclusive Micro Enterprises Financing, India's Sustainable Finance Roadmap as part of the GEF Aligning Finance Policies project.

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The opinions expressed herein are solely those of the authors and do not necessarily reflect the official views of the GGKP or its Partners.