The Role of Financial Literacy in MSME Growth

In India, the financial literacy landscape among small businesses presents a mixed bag of challenges and opportunities. These businesses grapple with issues such as inadequate financial literacy, difficulty in accessing affordable trade credit, poor financial controls, and lack of information – all these reasons contribute to rising default among micro and small enterprises.

Financial Literacy and MSME Performance are directly correlated; Entrepreneurs who have received some financial training make more informed financial decisions and manage risks better in the real world. The following real-life example illustrates this well:

Mumbai’s bustling Dharavi, one of the world’s largest slums, is home to numerous industrial and commercial establishments, including glass, garment and leather goods manufacturers. Many of them serve as suppliers to various domestic brands; several are exporters who collectively generate millions of dollars in revenue. One of these small businesses is a leather goods shop managed by a 33-year-old, armed with a B.Com degree. The owner sources raw leather and leather hides from suppliers in Kanpur, Chennai, and Kolkata to manufacture shoes, handbags, laptop bags, and jackets. Often, large lifestyle brands and pharmaceutical companies place orders with him for their conferences or corporate gifting purposes. Through his experience, he knows that banks are reluctant to lend to small businesses without adequate collateral and requisite financial documentation; this leaves small business owners like him dependent on informal sources like friends, family, or traditional moneylenders for funding.

Small business owners often find financial paperwork onerous; preparation of financial statements, GST and Income Tax filings take up considerable time. Export documentation is complex, with different certification requirements for various countries, making it difficult for small entrepreneurs to export successfully and realize their export proceeds in time.  For example, though the leather goods manufacturer in our example receives orders from Kuwait and Oman, he is wary of executing them and carries out his business operations through a middle man. Moreover, compliance tasks like GST Returns and IT Filing are often managed by professionals such as Chartered Accountants (CAs) and Export Consultants, which further bites into his net margins. 

Educating such MSMEs about finance, banking, and exports helps in preparing them to engage with the formal economy, rather than operating on its fringes through cash-based transactions.

Corporate & FinTech-Led Financial Education Programs

The Government has several initiatives to drive the training of small entrepreneurs. For eg., the National Institute of Entrepreneurship and Small Business Development (NIESBUD) is a premier organization of the Ministry of Skill Development and Entrepreneurship in this domain. The National Small Industries Corporation (NSIC) and various state governments also have several training initiatives for small businesses.

However, the responsibility of spreading financial literacy amongst small entrepreneurs is too large to be left to the Government alone. MSMEs increasingly engage with the supply chains of large corporates, as suppliers/ vendors and distributors/ dealers. This presents a very interesting opportunity for large corporates to drive financial and digital literacy via smartly designed training programs. A financially sustainable small business that has some digital capabilities will be a better customer or a more reliable supplier for a large corporate.

Fintechs that lend to micro and small businesses also can enhance their financial literacy through outreach programs that help these small businesses to borrow responsibly.  A very good example is the growth of Micro Finance institutions (MFIs) in India. Indian MFIs have provided self-help groups and their members with basic training on financial concepts and simple digital tools on their mobile phones. They have also assisted beneficiaries in building financial security by giving them access to suitable financial products and services at reasonable interest rates, replacing usurious moneylenders in the process. 

Trade Finance platforms like Vayana assist MSMEs that form part of large supply chains to get access to affordable trade credit. This helps them to avoid borrowing from unscrupulous money lenders and brings them into the formal economy. 

Corporates, Fintechs, Banks and Financial Institutions can take the lead in fostering financial education initiatives tailored to small businesses in several ways:

1. Hosting educational workshops and seminars, customized to cater to the diverse needs of micro and small entrepreneurs.

2. Producing simple financial education videos in local languages to make financial education more accessible and easier to grasp.

3. Training more evolved small businesses in cloud-based accounting and invoicing software which will help them streamline their financial reporting and improve cash flow management.  This, in turn, will help them access working capital finance from banks and NBFCs.

4. Banks can also generate awareness on platforms like TReDS and schemes like CGT SME to facilitate financing and provide credit guarantees for MSMEs accordingly, improving their access to financial support and working capital management.

In conclusion, financial literacy serves as a great driver for the growth of micro and small businesses. By equipping entrepreneurs with essential financial knowledge, we lay the foundations for a more inclusive and dynamic business ecosystem.