Opinion: How unsecured lending can revolutionize credit access for women MSME entrepreneurs - explained

By Hardika ShahOver the past few decades, India as a nation has increasingly come to recognize the significance of women’s participation in the formal economy. In alignment with this shift, the last couple of years have witnessed a rise in women's participation in the workforce.

According to the Economic Survey, the Female Labour Force Participation Rate (FLFPR) had increased over the past several years from 23.3% in 2017-18 to 41.7% in 2023-24. However, when it comes to entrepreneurship, the numbers tell a different story. Women own just 22% of all MSMEs, and their share drops to 12% in the small enterprise segment and a mere 7% in medium enterprises. This stark gap isn't due to a lack of ambition or ability. It's largely a result of systemic and financial barriers, with women accounting for 40% of the financing gap in the sector. The issue is clear: without access to adequate funding, many women entrepreneurs struggle to start or scale their businesses.One of the most significant obstacles is credit access. Traditional lending institutions require asset collateral to be pledged against a loan. Yet, in India, property ownership among women remains disproportionately low. According to data from the National Family Health (NFH) Survey, over 57% of women in India do not own a house either independently or jointly. This leaves many aspiring female entrepreneurs with limited options: either rely on informal lenders who charge exorbitant interest rates or forgo their business aspirations altogether.

Unsecured lending presents a revolutionary solution to this problem by eliminating the collateral requirement.Shifting the narrative from risk to opportunityBy shifting the focus from traditional asset-backed lending to alternative models, financial institutions can unlock a massive, underserved market while enabling women-led businesses to thrive. Interestingly, women borrowers have consistently demonstrated lower default rates, challenging the misconception that they pose a higher credit risk.

A World Bank study confirmed that women exhibit stronger repayment behavior, a trend echoed in our findings, where women entrepreneurs showed a lower default rate of 3.4% compared to 4.6% for male borrowers.

Despite being better borrowers, women entrepreneurs continue to face deeply entrenched biases in the lending ecosystem.Early-stage funding, particularly through loans with small ticket sizes that can be serviced easily, can be a game-changer for these entrepreneurs.

The demand for financing among women MSME entrepreneurs is evident, with women accounting for about 68% of the total Mudra loans disbursed. Further, the fall in the aggregate NPA of Pradhan Mantri Mudra Yojana (PMMY) loans from 4.9% in 2019-20 to 3.4% in 2023-24 reinforces that unsecured MSME lending isn’t inherently risky, and in fact, collateral-free loans can be a changemaker for the growth of MSMEs.Technology-driven lending models further strengthen this shift and help lenders see women borrowers as a promising segment rather than a high-risk one.

AI/ML-based credit assessment systems allow financial institutions to evaluate borrowers based on business performance and cash flow. Recognizing this, the government has announced the development of an alternative credit decisioning model that aims to integrate non-traditional data sources such as transaction history, GST filings, and utility payments into credit assessments.

As these innovations gain traction, they will enable a more inclusive lending ecosystem, ensuring women entrepreneurs receive the financial support they need to scale their businesses. Helming a generational shiftAccess to finance lends agency to women entrepreneurs. When they gain direct access to credit, women take control of their financial decisions, no longer remaining reliant on male family members as guarantors or intermediaries. This independence has transformative effects. According to data from the United Nations, women reinvest up to 90% of their earnings back into their families and communities, amplifying the impact of their success.According to data from the Udyam Registration Portal, women-led MSMEs contribute over 20% of total MSME sector employment in India, playing a crucial role in job creation. The success of women-owned businesses fosters social resilience by challenging gender norms and encouraging more women to pursue entrepreneurship and employment. Our MSME Insights survey (published in March ‘24) found that women-owned MSMEs that received formal credit created 11% more jobs for women than male-owned businesses, with a third of all new jobs in these enterprises going to women.

Women entrepreneurs demonstrated a 14% increase in monthly net income.Towards a more inclusive financial futureAccess to finance is a foundational step, but it is not enough. Women entrepreneurs also require mentorship, business training, and access to networks to navigate the complexities of scaling a business. Government initiatives like the Women Entrepreneurship Platform and credit schemes such as the Pradhan Mantri Mudra Yojana (PMMY) and the Stand Up India Scheme have made strides in this direction, but more targeted efforts are needed to ensure last-mile accessibility.

Digital literacy, in particular, remains a challenge. According to data from GSMA, the mobile usage gender gap in India stands at 30%, which means women are significantly less likely than men to access mobile internet. This disparity limits their ability to leverage digital banking, e-commerce, and online marketing. Bridging this gap through financial literacy programs and digital training can significantly enhance the effectiveness of unsecured lending by ensuring women entrepreneurs can maximize the benefits of formal financing.The impact of supporting women entrepreneurs extends far beyond economic gains. It has the potential to catalyze a generational shift, where more women enter the workforce, pursue higher education, and challenge deeply ingrained societal norms. Financial independence translates into greater decision-making power, not just in business but in all aspects of life. The Government of India has set ambitious targets for economic growth, aiming for a $30 trillion GDP by 2047.

Bain & Company estimates that nearly 45% of this growth must come from increased women’s workforce participation. If India is to meet these goals, financial inclusion for women entrepreneurs cannot remain a secondary priority, it must be a central pillar of the country’s economic strategy. Unsecured lending is a critical tool of empowerment, a catalyst for progress, and a necessary step towards a more equitable and prosperous future.(The author is Founder & CEO, Kinara Capital)