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The shift to artificial intelligence (AI) in microenterprise financing

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Transforming Micro Financing 24X7

Unsecured loans to ‘no-file’ micro enterprises

The shift to artificial intelligence (AI) in microenterprise financing 

The insights presented here pertain to only no-file microenterprises in up to ₹ 5L unsecured loan segment.

One of the popular applications of AI in microenterprise financing is underwriting/ credit appraisal through machine learning (ML). The ML based data model provides cognitive analysis and advice to credit officers while evaluating the creditworthiness of micro-enterprises. Unlike statistical or benchmarks based template financing model, ML emulates human mind better.

The ML based underwriting model mimics a credit officer’s ability to learn from experience and then automates decision-making, without loss in quality of the portfolio, while making the evaluation time independent of the complexity. This is accomplished by training the ML based model with data of hundreds of thousands of micro-enterprises from diverse geographies.

The ML based underwriting model has achieved a phenomenal accuracy of 85% at pan-India level in 50+ business sectors. The accuracy in popular business sectors (like trading, hotel and fast-food) is over 90%.

The artificial intelligence holds great promise to tap into mass market of ‘missing middle’ microenterprise segment.

 
   
Optimal mix of AI and human touch  


AI in loan origination
Accuracy of ML model depends on quality of training dataset. In no-file micro-enterprise segment where data scarcity itself is the fundamental problem and where high percentage of customers are new to credit, creation of training dataset becomes a key challenge. The problem has been solved by collecting cross-sectional data (comprising financial, non-financial and psychometric parameters) and time-series data through physical surveys at doorstep of microenterprises.

Human touch in servicing and collection

Human touch plays an important role in servicing and collection for one-third borrowers who are less tech-savvy and less financially-literate.
An optimal mix of AI and human touch is the key to maximize RoI.

 
   
Benefits of AI  


Ability to tap into mass market
AI makes tapping into mass market of ‘missing middle’ financially viable

Ability to scale up faster
With reduced dependence on (trained) manpower, the go-to-market time at any new location is reduced

Increase in productivity
With artificial intelligence, same credit appraisal can be performed in fraction of seconds at 85-90% accuracy

Reduced cost of operations
With an optimal mix of AI and human touch, a lender can achieve same portfolio quality at 33% of traditional opex cost


Future lies with AI


In next five years..

  • Traditional touch-heavy model may be limited to underwriting loans of larger enterprises only (greater than ₹ 25L loan segment)
  • Traditional touch-heavy MFIs may continue to service (less than ₹ 1L) microfinance segment through group lending
  • Mass market (characterized by greater than ₹ 1L and less than ₹ 25L loan segment) may be serviced by optimal mix of AI and human touch
  • Lesser opex cost and higher productivity may lead to much lower interest rate to end borrower

 

Know the entrepreneurs around you better

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Transforming Micro Financing 24X7
Unsecured loans to 'no-file' micro enterprises


Know the entrepreneurs around you better 


Imagine standing at the doorstep of bakery shop owner named Ashok Kumar in a semi-urban market on a state highway in India. Ashok has been running the shop for three years and has clocked an average daily sale of ₹ 2500.

Can we call him an entrepreneur? If yes, what type of entrepreneur? How do we quantify the inherent risk from perspective of a lender? 

Extensive research indicates that people like Ashok can be classified into either an opportunity entrepreneur or a necessity entrepreneur. 
 
   
Opportunity vs Necessity entrepreneur

Opportunity entrepreneurs are driven for scale and are motivated to take leverage to fuel their ambitions. They can often be found talking about growth, making plans, learning new practices and willing to take bigger risks. 
On the other hand, necessity entrepreneurs do business out of necessity. They are satisfied with status quo and are averse to taking loan. They can often be found stocking meager inventory, struggling to survive, making both ends meet and shunning risk.


Classification

At a first glance, one may not be able to distinguish between an opportunity entrepreneur and a necessity entrepreneur. However, by delving deeper and making following observations – Whether the entrepreneur is doing business out of necessity or out of drive? Whether the shop is understocked or overstocked? Whether the size of the shop has grown over-time? Whether the entrepreneur has taken loan to fund the growth? Whether entrepreneur has learned and adopted business best practices? Whether entrepreneur has dreams of further scaling up the business? – one can classify a person into an opportunity entrepreneur or a necessity entrepreneur. 


Opportunity entrepreneurs carry higher risk than a necessity entrepreneur, from lender's perspective.
What do you say - What are different kinds of entrepreneurs and associated risks? We would love to hear your feedback.
About Us: IMV facilitates loans to MSME and small scale industries in India through partner microfinance institutions, NBFCs and SFBs. IMV’s sister concern, Enable Livelihoods Foundation which is a social enterprise, has vast experience of working in space of rural development, skill development and social entrepreneurship. The founders, themselves being social entrepreneurs in India, have authored several publications on microenterprise and entrepreneurship.  

Contact us

Pranay Bhargava
CEO & Founder
www.impaact.in
pranay@impaact.in
+91 9848748364
 

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How do opportunity entrepreneurs differ from necessity entrepreneurs? 

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Transforming Micro Financing 24X7
Unsecured loans to 'no-file' micro enterprises


What do you say - How do opportunity entrepreneurs differ from necessity entrepreneur? 


Imagine being a senior bureaucrat in planning commission which is formulating a policy for addressing the mentoring and credit needs of micro-entrepreneurs.  

Would your policy be targeted towards opportunity entrepreneurs or necessity entrepreneurs or both? If both, how and why?  

Experience indicates that needs, personalities, traits, behavior, habits and abilities of opportunity entrepreneurs differ significantly from that of necessity entrepreneurs. In fact, both can be categorized as opposites. One standard policy cannot and should not target both at one go. Let’s delve deeper into differences – 
 
   
Appetite for risk and leverage

Opportunity entrepreneurs have significantly higher risk appetite than necessity entrepreneurs. By nature, opportunity entrepreneurs are adept at taking calculated risks driven by intuition while necessity entrepreneurs are averse to uncertainty and risk.
Opportunity entrepreneurs also have high propensity for leverage. They do not mind taking heavy debt for growth and achieving their ambitions. On the other hand, necessity entrepreneurs are averse to leverage. 


Largeness of vision and predictive capability
Opportunity entrepreneurs are known for large vision and ‘the need to achieve’. They are driven individuals with ambitions to scale and grow steadily: from 0 --> X, from X--> X++ and from X --> Y. On the other hand, necessity entrepreneurs are typically satisfied with either a chance to marginally exploit the high season or the status quo.
Opportunity entrepreneurs also have sophisticated intuition of predicting the size of market and therefore, the opportunity. Necessity entrepreneurs on the other hand go by very rational  approach of surviving the competition.
 
   
Openness to innovation

Opportunity entrepreneurs have high propensity for innovation which pushes the market forward. On the other hand, necessity entrepreneurs are best manifestations of ‘herd behavior’. Necessity entrepreneurs don’t like to experiment/ innovate and are more comfortable in following the already established models.
What do you say - How do opportunity entrepreneurs differ from necessity entrepreneurs? We would love to hear your feedback.
About Us: IMV facilitates loans to MSME and small scale industries in India through partner microfinance institutions, NBFCs and SFBs. IMV’s sister concern, Enable Livelihoods Foundation which is a social enterprise, has vast experience of working in space of rural development, skill development and social entrepreneurship. The founders, themselves being social entrepreneurs in India, have authored several publications on microenterprise and entrepreneurship.

Contact us

Pranay Bhargava
CEO & Founder
www.impaact.in
pranay@impaact.in
+91 9848748364
 

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What are the most suitable loan products for micro entrepreneur?

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Transforming Micro Financing 24X7
Unsecured loans to 'no-file' micro enterprises


What do you say - What are the most suitable loan products for micro entrepreneur? 


Imagine being on RBI (central bank) committee which has been formed to develop a policy framework for suitable loan products for micro enterprises.  

What aspects would you look at? Would you design loan products as per cashflow characteristics of micro enterprise? If yes, do most of them have similar cashflows and risk profiles? 
 
Research indicates that micro enterprise growth can be classified into four categories – 0 --> X, X --> X+, X --> X++ and X --> Y. These growth classifications have different cashflow characteristics and require different loan products. 
 
 
   

0 --> X and X --> Y
This is applicable mostly to opportunity entrepreneurs. Starting up a business or diversifying into a new business requires patient capital. Owing to uncertainty in initial months w.r.t. sales and go-to-market success, fixed repayments can not be expected until break-even, which  in turn depends on external factors like price elasticity, labor costs, raw material costs etc. In informal microenterprise sector, the most suitable financial instrument which conforms to features of patient capital is ‘quasi-equity' financing wherein repayments are linked to cashflows of business.


X --> X+
This is applicable mostly to necessity entrepreneurs, who are averse to both risk and leverage. In this growth classification, there is temporary intake of working capital to fund high season sales. Owing to predictable nature of seasonality and sales cycle, borrowers can optimize on fund withdrawals and therefore, the interest expenses. The most suitable financial instrument for meeting short-term working capital needs is Cash Credit Limit/ Overdraft, which unfortunately, is not available to retail and services enterprises in informal sector in India. 
 
   

X --> X ++
This is applicable to both necessity and opportunity entrepreneurs. Expanding a business requires capital investment (say, for higher capacity machinery, furniture, shed, stock, infrastructure etc) and a repayment schedule suitable to cashflows of business. The most suitable financial instrument for meeting capital investment is a Term Loan, which interestingly is the only loan product available for all growth classifications in informal sector in India. 
What do you say - What are the most suitable loan products for micro entrepreneur? We would love to hear your feedback. 
About Us: IMV facilitates loans to MSME and small scale industries in India through partner microfinance institutions, NBFCs and SFBs. IMV’s sister concern, Enable Livelihoods Foundation which is a social enterprise, has vast experience of working in space of rural development, skill development and social entrepreneurship. The founders, themselves being social entrepreneurs in India, have authored several publications on microenterprise and entrepreneurship.  

Contact us

Pranay Bhargava
CEO & Founder
www.impaact.in
pranay@impaact.in
+91 9848748364
 

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What must be the key ingredients of any policy addressing the micro entrepreneurs?

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Transforming Micro Financing 24X7
Unsecured loans to 'no-file' micro enterprises


What do you say - What must be the key ingredients of any policy addressing the micro entrepreneurs? 


Imagine being a senior bureaucrat in rural development department of your state. You’ve been assigned a task of developing a policy framework for strengthening microenterprises in unorganized sector. 

What will be the top three non-negotiables around which your policy will evolve? How will you maximize the benefit to cost ratio?  

Extensive research indicates that there are three pillars which form a cost-effective and sustainable policy –  
 
   
Provision of knowledge at doorstep of microenterprise

Micro entrepreneurs, whether existing or new, are too pre-occupied to attend a ‘training workshop’ for certain number of days. Unless the knowledge – primarily the exposure to best practices and data-driven business intelligence – is facilitated at their doorstep, it is unfair to expect them to learn and grow. Putting videos - comprising the tricks of the trade, the Do’s and the Don’ts, the best practices in marketing & operations and the financial management – on the mobile phones of entrepreneur has been found to be the most cost effective way of building capacity of micro enterprises at their doorstep. 
It has been observed that provision of data-driven business intelligence – say, book keeping module, regional profitability analytics and market trends – on micro entrepreneur’s mobile phones is significantly more cost effective than class room based training sessions.


Mentoring by local successful entrepreneurs
One tends to seek mentoring from fellow entrepreneur who has been through similar struggle and growth path. In case of micro entrepreneurs, the most sought after mentors are the locally successful/ renowned microentrepreneurs – not the city-dwelling professionals who do not belong to their known environment and ecosystem. Based on experience, motivational videos of local successful entrepreneurs have been found to be the most cost-effective in meeting the mentoring and motivational needs of micro enterprises.
 
 
   
Cashflow based financing
The financial ecosystem is still not conducive to micro enterprises in unorganized sector. There are only two channels for credit to reach to the last mile beneficiaries – government promoted SHG infrastructure and MFI promoted JLG infrastructure – apart from the collateral based lending by banks. Both the channels resort to one standard credit product – term loan – to serve all types of credit needs for all type of micro enterprises. On one side, first generation entrepreneur is expected to startup and grow the business with a term loan and on the other side, a necessity entrepreneur is expected to meet seasonality based working capital needs with a term loan – none of the scenarios in conformation to the actual cashflow of enterprise. It’s fair to say that financial ecosystem in unorganized sector is far from meeting the actual needs of micro entrepreneurs.
What do you say - What must be the key ingredients of any policy addressing the micro entrepreneur? We would love to hear your feedback.
About Us: IMV facilitates loans to MSME and small scale industries in India through partner microfinance institutions, NBFCs and SFBs. IMV’s sister concern, Enable Livelihoods Foundation which is a social enterprise, has vast experience of working in space of rural development, skill development and social entrepreneurship. The founders, themselves being social entrepreneurs in India, have authored several publications on microenterprise and entrepreneurship.  

Contact us

Pranay Bhargava
CEO & Founder
www.impaact.in
pranay@impaact.in
+91 9848748364
 

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What are the most common pitfalls of first generation micro entrepreneurs?

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Transforming Micro Financing 24X7
Unsecured loans to 'no-file' micro enterprises


What do you say - What are the most common pitfalls of first generation micro entrepreneurs? 


Imagine being a close acquaintance of a person who is attempting to startup a business in informal sector in India. Coming from a backward caste, this person is not having many precedents to follow. Being a first-generation entrepreneur and one with high ambitions, the person qualifies as an opportunity entrepreneur. You are in position to observe the journey of this person closely.  

Do entrepreneurs irrespective of how smart, logical or intellectual they may sound look at the opportunities 'rationally'? If not, are there any pitfalls which are common to many? Is there any pattern in mistakes?  
 
   
Overoptimism

First generation opportunity entrepreneurs tend to over-predict sales and go-to-market success that can be achieved in certain time frame. Because of over-optimistic projections, they tend to start ‘big’ by investing in larger capacity machinery or larger amount of inventory. They end up blocking more-than-required capital (which most likely comes from leveraging) in inventory or machinery instead of starting up lean. When reality hits, many find themselves vulnerable to financial crisis and even mortality. 


Obsession with product rather than market
Especially in products business, there is high tendency of confining to one’s own world by focusing on perfecting the product as per own standards rather than testing out the market acceptance in iterative manner. The first-generation opportunity entrepreneurs falling in this trap usually find themselves at dead ends wherein too much resources have gone into perfecting the features which do not add much value to customers.
 
   
Sub-optimal prioritization

This pitfall can also be called 'putting cart before the horse'. The pre-requisite of being an opportunity entrepreneur is having a vision and a mission, which can be achieved through long-term and short-term goals. Opportunity entrepreneurs are many a times found allocating more-than-required resources on long term goals rather than focusing first on low-hanging short term goals for survival. This leads to sub-optimal allocation of resources.
So what do you say - What are the most common pitfalls that first generation opportunity entrepreneurs face? We would love to hear your feedback.
About Us: IMV facilitates loans to MSME and small scale industries in India through partner microfinance institutions, NBFCs and SFBs. IMV’s sister concern, Enable Livelihoods Foundation which is a social enterprise, has vast experience of working in space of rural development, skill development and social entrepreneurship. The founders, themselves being social entrepreneurs in India, have authored several publications on microenterprise and entrepreneurship.  

Contact us

Pranay Bhargava
CEO & Founder
www.impaact.in
pranay@impaact.in
+91 9848748364
 

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From lender’s perspective, who is more risky – opportunity or necessity entrepreneur?

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Transforming Micro Financing 24X7
Unsecured loans to 'no-file' micro enterprises


What do you say - From lender's perspective, who is more risky - opportunity or necessity entrepreneur? 


Imagine being the chief risk officer of a microfinance institution or that of NBFC focused on microenterprises.  

How would you segment the portfolio into necessity entrepreneurs (NE) and opportunity entrepreneurs (OE) for optimal PAR (portfolio at risk)? That is, what weight would you assign to W(OE) and W(NE) so that overall PAR is minimized given the respective PARs being PAR(OE) and PAR(NE)? 

Min (PAR) = f (WOE, WNE, PAROE, PARNE)  

Experience indicates that NEs carry significantly less PAR than OEs with reason being – 
 
   
OEs have tendency to start big

Opportunity entrepreneurs have higher tendency to start big owing to largeness of their vision. They tend to invest more-than-required in stock/ machinery due to over-optimism in prediction of sales and go-to-market success. Necessity entrepreneurs, on the other hand, are too skinny, under-stocked and under-invested. Financial crisis and uncertainty are, therefore, found to be high in case of opportunity entrepreneurs.


OEs have irregular cashflows
Opportunity entrepreneurs have irregular and unpredictable cashflows as compared to necessity entrepreneurs. Opportunity entrepreneurs' cashfows depend considerably on go-to-market success and sales cycles in their respective sectors. Due to inherent uncertainty, opportunity entrepreneurs have significantly less control over cash flows as compared to that of necessity entrepreneurs. During repayment of term loan (which is the only credit instrument available to SHGs and JLGs in India and also to NBFC clients), opportunity entrepreneurs tend to have higher arrears as compared to necessity entrepreneurs.
 
   
OEs have perseverance

Opportunity entrepreneurs are known for perseverance and resilience in difficult times. Necessity entrepreneurs, on the other hand, tend to drift away and change direction based on course of life (e.g. switching from business to job whenever the opportunity arises). Opportunity entrepreneurs tend to keep afloat in face of adversities, thereby, earning trust of their financiers. 
So what do you say - From lender's perspective, who is more risky - opportunity or necessity entrepreneur? We would love to hear your feedback.
About Us: IMV facilitates loans to MSME and small scale industries in India through partner microfinance institutions, NBFCs and SFBs. IMV’s sister concern, Enable Livelihoods Foundation which is a social enterprise, has vast experience of working in space of rural development, skill development and social entrepreneurship. The founders, themselves being social entrepreneurs in India, have authored several publications on microenterprise and entrepreneurship.  

Contact us

Pranay Bhargava
CEO & Founder
www.impaact.in
pranay@impaact.in
+91 9848748364
 

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What are the different kinds of cognitive biases in micro entrepreneurs?

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Transforming Micro Financing 24X7
Unsecured loans to 'no-file' micro enterprises


What do you say - What are the different kinds of cognitive biases in micro entrepreneurs? 


Imagine working with an opportunity entrepreneur in out-skirts of Tier-1 town. While working in the same shop, you get to observe this person closely – one's psyche, behavior, habits, actions and decisions. 

Would you find anything unusual and irrational? If yes, what would these irrationalities (in other words, cognitive biases) be?  

Extensive research indicates that opportunity entrepreneurs have various cognitive biases. Some of them are discussed below – Sunk cost fallacy, Self-serving bias, Selective perception, Ostrich effect and Optimism bias. 
 
   
Sunk cost fallacy, Ostrich effect & Optimism bias

Due to sunk cost fallacy, you will find that Opportunity entrepreneur, whom you have been working with, will continue to complete things that one has already invested time and energy in spite of facing increasingly negative outcomes. Due to ostrich effect, you will find that person avoiding apparently risky financial situation by pretending it does not exist. And due to optimism bias, you will find that person to believe that one is at lesser risk of experiencing a negative event compared to others.
 


Selective Perception and Self-serving bias
Due to selective perception, you will find that this person tends to not notice (and more quickly forget) stimuli that causes emotional discomfort and contradicts prior beliefs. You will also notice that due to self-serving bias, this person tends to search for, interpret, favor and recall information in a way that confirms one's pre-existing beliefs or hypothesis.


Whether lender or government, understanding the psyche of both opportunity and necessity entrepreneur plays a key role in design of appropriate financial products, policies and last-mile implementation strategies. 
What do you say - What are the different kind of cognitive biases in micro entrepreneurs? We would love to hear your feedback
About Us: IMV facilitates loans to MSME and small scale industries in India through partner microfinance institutions, NBFCs and SFBs. IMV’s sister concern, Enable Livelihoods Foundation which is a social enterprise, has vast experience of working in space of rural development, skill development and social entrepreneurship. The founders, themselves being social entrepreneurs in India, have authored several publications on microenterprise and entrepreneurship.  
 

Contact us

Pranay Bhargava
CEO & Founder
www.impaact.in
pranay@impaact.in
+91 9848748364
 

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Do you know what makes an entrepreneur go through and come out of financial crisis without succumbing to pressure?

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Transforming Micro Financing 24X7
Unsecured loans to 'no-file' micro enterprises


Do you know what makes an entrepreneur go through and come out of financial crisis without succumbing to pressure?  


Imagine owning a garment manufacturing unit on the out-skirts of tier-2 town. Since this first business is cashflow positive, you decide to set-up an affiliate business – embroidery unit – with an initial investment of Rs. 5 lakhs. You have invested your savings and cashflow from first business along with borrowing from friends and family to cover the first Rs. 2 lakhs of investment  – to purchase machinery, rent out factory location, create shed, purchase furniture and hire first few labor. For the rest Rs. 3 lakhs, you had applied to a local bank three months back. The funds were supposed to come within two months of application i.e. a month back. However, looking at bank’s slow TAT, it may take another 1-2 months for funds to hit your bank account. In such a scenario with increased burn rate, you are cash-starved with no certainty of the financial crisis ending soon. 

What would you do? How would you deal with the financial crisis?  
 
 
   
Cognitive bias to shun financial crisis

Research indicates that opportunity entrepreneurs go through such financial crisis quite often - sometimes with negligible uncertainty while many a time with severe uncertainty – for pro-longed period which is enough to completely drain an entrepreneur mentally and emotionally. A cognitive bias called ‘ostrich effect’ comes to the rescue.


Ostrich Effect
Ostrich effect is defined as ‘the avoidance of apparently risky financial situation by pretending it does not exist’. This cognitive bias, while facilitating the irrational behavior, lets an opportunity entrepreneur go through an extreme financial crisis without getting (completely) drained emotionally and mentally. Ostrich effect lets an opportunity entrepreneur persevere through difficult financial times without succumbing to pressure.
What do you say - Do you know what makes an entrepreneur go through and come out of financial crisis without succumbing to pressure? We would love to hear your feedback
About Us: IMV facilitates loans to MSME and small scale industries in India through partner microfinance institutions, NBFCs and SFBs. IMV’s sister concern, Enable Livelihoods Foundation which is a social enterprise, has vast experience of working in space of rural development, skill development and social entrepreneurship. The founders, themselves being social entrepreneurs in India, have authored several publications on microenterprise and entrepreneurship.

Contact us

Pranay Bhargava
CEO & Founder
www.impaact.in
pranay@impaact.in
+91 9848748364
 

Follow us