The role of small finance banks in financing micro entrepreneurs in Kerala

Abstract

Financial inclusion is crucial for achieving inclusive growth and sustainable economic development, both globally and within India, as it provides essential financial services needed to reduce poverty and support national developmental goals. In the Indian economic landscape, micro-entrepreneurs hold a significant position, contributing meaningfully to employment generation, innovation, and regional development. However, despite their importance, the growth and expansion of these enterprises are often constrained by limited access to formal financial support. Many micro-units are excluded from traditional financing due to rigid lending norms, stringent collateral requirements, complex documentation procedures, and challenges in maintaining formal financial records. Addressing this financing gap is vital for strengthening the micro-entrepreneurial sector, sustaining economic growth, and fostering overall development. To address the persistent problem of financial exclusion among underserved groups, the Reserve Bank of India, acting on the recommendations of the Nachiket Mor Committee, introduced Small Finance Banks as a differentiated category of banks. SFBs were established to promote financial inclusion by offering basic banking services and extending credit to small business units, marginal farmers, and micro enterprises through technology-driven, low-cost operations. Despite this clear mandate, limited research has examined the extent to which SFBs improve access, usage, service quality, and economic empowerment. This study fills this gap by analysing the structure and financial product portfolio of SFBs, assessing their role in the financial inclusion of micro-entrepreneurs, evaluating their contribution to the empowerment of micro women entrepreneurs, and measuring overall customer satisfaction. The study adopted a mixed-methods approach using a descriptive and analytical research design, drawing on both primary and secondary data. The institutional focus centered on customers of ESAF SFB, with a sample of 383 micro-entrepreneurs selected through a multi-stage random sampling technique across four districts in Kerala. As the primary data exhibited a non-normal distribution, non-parametric statistical tests were extensively employed for inferential analysis. A researcher- developed Financial Inclusion Index was used as a key tool for measuring financial inclusion level. Additionally, Partial Least Squares Structural Equation Modeling wasapplied to validate the conceptual framework and examine the structural relationships influencing business growth. Findings on the structure of SFBs indicated strong adherence to regulatory requirements. All SFBs consistently met the mandated Priority Sector Lending norms and maintained a lending pattern in which small-ticket and micro loans formed the core of their portfolios. Analysis of their operations showed that services are highly accessible, supported by quick loan processing enabled by minimal collateral requirements and efficient digital systems. Customer satisfaction was generally high regarding processing speed and the absence of collateral; however, dissatisfaction was notable with respect to high interest rates, restricted credit limits, and rigid repayment schedules. In brief, SFBs are functioning as transformative agents of inclusive financial development in Kerala by effectively removing key barriers, ensuring efficient access, and delivering high-quality services, which have translated into notable business growth and women’s empowerment. However, to fully achieve their financial inclusion mandate, SFBs must strengthen actual usage levels by addressing the primary sources of customer dissatisfaction. The study recommends that policymakers and SFBs re-evaluate high loan interest rates and introduce more flexible credit terms, limits, and repayment schedules that better reflect the diverse cash-flow patterns of micro-enterprises, thereby ensuring affordable and sustainable entrepreneurial development.