Bridging the Finance Gap for Women Entrepreneurs

17. India: Policy insights on financial literacy

Dr. Roshni Narendran
University of Tasmania

Background

Despite many well-known success stories, India has only around 13.5–15.7 million women-owned businesses, comprising only 20% of all businesses (Priya, 2023[1]). Although gender-specific statistics are not available, over 90% of India's start-ups fail within the first year (Marshall et al., 2016[2]) with the dearth of capital cited as one of the key causes (Goswami, Murti and Dwivedi, 2023[3]). This raises a significant concern as to identifying the missing elements in the policy environment. This policy insight note examines the challenges associated with overlooking the crucial role of financial literacy in allocating grants and loans to women entrepreneurs.

General financial literacy rates in India remain low. As of 2021, there were 646 million women in India, of whom only 24% were financially literate (ADB, 2022[4]). Despite the low financial literacy among women, women-owned small- and medium-enterprises have accessed around 430 crores (USD 51 million), accounting for 24% of disbursed loans (Deshpande, 2023[5]). Financially illiterate entrepreneurs can be significantly impaired in accessing loans, repaying debts, managing expenses, managing financial statements and managing profits. This issue is particularly pronounced when individuals enter into business out of economic necessity rather than motivated by their business skills.

Policy issue: The need to boost the financial literacy of women entrepreneurs

The Government of India provides funding to women entrepreneurs through a number of schemes, including the Mudra loan1 where beneficiaries receive a maximum of 10 lakhs (approximately USD 1 100) (Bank of Baroda, n.d.[6]) and Mahila2 Samriddhi Yojana, which is a microfinance loan for scheduled caste3 women with a loan provision maximum of Rs. 1.4 (approximately USD 1 676) (National Scheduled Castes Finance and Development Corporation, 2024[7]). In addition, Mahila Coir Yojana is a self-employment programme that provides incentives for rural women artisans to purchase pieces of machinery that produce coir fibre.4 While government assistance seeks to support women businesses, a substantial portion of women are recorded as having lower financial literacy (Saluja, 2023[8]). This raises an important question regarding the extent to which financial literacy influences business survival.

In addition, low rates of financial literacy and high poverty are prevalent among women in rural areas. According to a recent Ministry of Micro, Small and Medium Enterprises annual report, rural areas have a slightly greater share of women-owned enterprises (22%) than urban areas (18%) (MicroSave Consulting, 2022[9]). The lower level of financial literacy makes women vulnerable to predatory lenders (loan sharks), resulting in incurring significantly higher interest rates (ADB, 2022[4]). There is evidence to show the increase in business performance among financially literate individuals (Mathew, 2019[10]; Anshika, Singla and Mallik, 2021[11]). This highlights the important role of financial literacy in obtaining government loans or grants for business purposes.

Despite the significant impact of financial literacy on women’s economic well-being and business performance, there is insufficient discussion on how financial literacy affects loan repayment and whether financial literacy enhances successful utilisation of government business grants. In the Entrepreneurship Policy 2015 (Government of India, 2015[12]), financial literacy was only mentioned once within the context of employability skills. However, financial literacy is particularly pertinent for the self-employed. In recent years, government is recognising the importance of financial inclusion among all women across India (Kumar, 2023[13]). Financial inclusion ensures that the poorest population in India has access to formal financial services. Financial inclusion does not negate the importance of financial literacy because it is crucial to making informed and effective decisions about the use of financial services. Low financial literacy can be a catalyst for business closure. Instead of treating financial education separately, it should occupy a significant portion of the entrepreneurship policy.

Recently, the Indian government developed the Compulsory Teaching of Financial Education Act, 2022 (Government of India, 2022[14]). However, the act focuses on the general population rather than businesses. Although incorporating financial education in the legislation is a positive step forward, further steps would help spread its benefits to businesses and reach out to the current cohort of women in poverty and women with low financial literacy among the adult population.

Conclusions

Low financial literacy rates among women-owned businesses in India are a barrier to access to finance and to business success. The government operates a number of measures to address finance constraints for women entrepreneurs, including through grants and loans for marginalised women business owners in rural areas. However, financial illiteracy is still prevalent in rural regions and across much of the population, which can reduce the ability of women entrepreneurs to access supports and make use of them effectively. Alongside initiatives to improve employment skills, boosted government programmes could aim to improve financial literacy rates for women entrepreneurs through workshops and mentorship as a provision for accessing government loans and grants.

References

[4] ADB (2022), In India, financial literacy programs are lifting families out of debt and fueling new prosperity, Asian Development Bank, http://www.adb.org/results/india-financial-literacy-programs-lifting-families-out-debt-fueling-new-prosperity (accessed on 5 February 2024).

[11] Anshika, A., A. Singla and G. Mallik (2021), “Determinants of financial literacy: Empirical evidence from micro and small enterprises in India”, Asia Pacific Management Review, Vol. 26/4, pp. 248-255, https://doi.org/10.1016/j.apmrv.2021.03.001.

[6] Bank of Baroda (n.d.), Pradhan Mantri Mudra Yojana, http://www.bankofbaroda.in/personal-banking/loans/pradhan-mantri-mudra-yojana (accessed on 22 February 2024).

[16] BBC (2019), What is India’s caste system?, https://www.bbc.com/news/world-asia-india-35650616 (accessed on 19 June 2024).

[17] Department of Social Justice and Empowerment (n.d.), List of Scheduled Castes, https://socialjustice.gov.in/common/76750 (accessed on 26 February 2024).

[5] Deshpande, P. (2023), “Achieving financial inclusion through encouragement to women entrepreneurs”, The Times of India, https://timesofindia.indiatimes.com/blogs/truth-lies-and-politics/achieving-financial-inclusion-through-encouragement-to-women-entrepreneurs (accessed on 28 September 2024).

[15] Financial Express (2024), Over Rs 27.75 lakh crore of loans disbursed under MUDRA loan scheme, https://www.financialexpress.com/business/sme/over-rs-27-75-lakh-crore-of-loans-disbursed-under-mudra-loan-scheme/3430826/ (accessed on 19 June 2024).

[3] Goswami, N., A. Murti and R. Dwivedi (2023), “Why do Indian startups fail? A narrative analysis of key business stakeholders”, Indian Growth and Development Review, Vol. 16/2, pp. 141-157, https://doi.org/10.1108/IGDR-11-2022-0136.

[14] Government of India (2022), The Compulsory Teaching of Financial Education Bill, 2022, Bill No. 15 of 2022 introduced in the Lok Sabha, https://sansad.in/getFile/BillsTexts/LSBillTexts/Asintroduced/15%20of%202022%20as%20intro.pdf?source=legislation (accessed on 15 February 2024).

[12] Government of India (2015), National Policy on Skill Development and Entrepreneurship 2015, https://www.msde.gov.in/en/reports-documents/policies/national-policy-skill-development-and-entrepreneurship-2015 (accessed on 22 February 2024).

[13] Kumar, S. (2023), Financial Inclusion of Women: Current Evidence from India, https://www.orfonline.org/research/financial-inclusion-of-women-current-evidence-from-india (accessed on 20 June 2024).

[2] Marshall, A. et al. (2016), How entrepreneurial startups redefine India’s economic growth, https://www.ibm.com/thought-leadership/institute-business-value/en-us/report/startupindia (accessed on 22 February 2024).

[10] Mathew, A. (2019), Women struggle to break down barriers to starting a business, International Monetary Fund, https://www.imf.org/en/Publications/fandd/issues/2019/03/womens-entrepreneurship-in-India-mathew (accessed on 14 February 2024).

[9] MicroSave Consulting (2022), Decoding government support to women entrepreneurs in India: the anatomy of entrepreneurship support schemes, MicroSave Consulting, https://www.niti.gov.in/sites/default/files/2023-03/Decoding-Government-Support-to-Women-Entrepreneurs-in-India.pdf (accessed on 15 February 2024).

[7] National Scheduled Castes Finance and Development Corporation (2024), Mahila Samriddhi Yojana, Ministry of Social Justice and Empowerment, Govt. of India, https://nsfdc.nic.in/en/mahila-samriddhi-yojana (accessed on 26 February 2024).

[1] Priya, R. (2023), “How women founders/entrepreneurs redefine norms, fight odds, and build successful businesses”, The Times of India, https://timesofindia.indiatimes.com/blogs/voices/how-women-founders-entrepreneurs-redefine-norms-fight-odds-and-build-successful-businesses (accessed on 22 February 2024).

[8] Saluja, R. (2023), “International Women’s Day: How financial literacy can empower women in India”, The Economic Times, https://economictimes.indiatimes.com/markets/stocks/news/international-womens-day-how-financial-literacy-can-empower-women-in-india/articleshow/98494289.cms?from=mdr (accessed on 14 February 2024).

Notes

← 1.  Mudra loan is Pradhan Mantri MUDRA Yojana implemented by the Prime Minister. Individuals who are involved in non-corporate or non-farm small- or micro-businesses could get a loan up to Rs 10 lakhs (approximately USD 1 100). 69% of the loan was disbursed to women, which amounts to Rs. 30.64 crores (approximately USD 3 million) (Financial Express, 2024[15]).

← 2.  Mahila means women in Hindi.

← 3.  There are over 3 000 castes and 25 000 sub-castes in India (BBC, 2019[16]). The caste system bestowed privileges to some and repression of lower castes, so to eradicate the social discrimination government of India in 1950s implemented quotas in government jobs, educational institutional, grants and loans for sections of the population that is socially discriminated one such community is the Scheduled Caste. The members of the Scheduled Caste are also known as the Dalit. Schedule Caste is one of the disadvantaged social groups in India, so government provide targeted financial assistance. The list of castes included in the Scheduled Castes classification can found in the Department of Social Justice and Empowerment (Department of Social Justice and Empowerment, n.d.[17]).

← 4.  Coir fibre - Natural fibre extracted from the coconut husk.