Ensuring Access to Finance for Small, Medium and Micro Enterprises

The Network Enterprises Approach

By
Dr. Nachiket Mor

Introduction

It is generally recognised that Small, Medium and Micro Enterprises (SMEs) are a powerful engine for
both accelerated growth and job creation on an economy-wide basis. Policy makers and
governments world-wide therefore are constantly looking for ways to support this growth. However
this has proved to be an elusive goal and attempts to train people for entrepreneurship, identify
clusters for intensive efforts, intervene through skill building and community mobilisation at the
village level, setting up credit guarantee funds and dedicated stock exchanges, have all, at best had
mixed results.

Directly related to this have been the difficulties of finding scalable models for funding SMEs.
Viability is hard to establish, risks are hard to quantify and equity investors, even those willing to
take on higher levels of risk have found it very difficult to build a consistent investment strategy.
And, it is not clear that a company by company investment strategy is necessarily the best way to
address the financing challenges of millions of SMEs that are looking for risk capital. With all these
difficulties debt providers have stayed away as well and it is very difficult if not impossible for most
SMEs to find financiers willing to provide them with loans.

IFMR Ventures has recently launched an equity fund, the Network Enterprises Fund (NEF), to try and
find a solution to this problem particularly for enterprises operating in remote rural areas. This note
lays out the thought process behind the fund and seeks to build the case for an approach that we
believe may be the key to solving most of the above mentioned problems. While in our work we
have focussed on rural markets this approach in our view has much more general applicability to the
entire SME sector.

Characteristics of SMEs

Before we start to outline our ideas, it would be important to understand what features of the SME
give rise to these problems and why is it that larger enterprises are not as exposed to them. Clearly
the manifest distinguishing feature of the SME is its small size relative to a larger enterprise but why
should that necessarily be a problem? The answer to this depends on the number and nature of
linkages that the SME has with the world beyond its immediate vicinity.

For a grocery store that buys relatively well established consumer products from the urban
wholesaler and retails it in her village after adding her margin to it, the small size is actually an
advantage. It allows her to remain nimble and efficient and to adapt to changing circumstances in a
way that a larger enterprise may find difficult to do. The situation is quite different however for a
rural producer that is trying to sell locally manufactured stuffed toys into an urban market. Changes
in demand and the prices of raw materials, both outside the immediate control of the producer,
could result in her enterprise being driven to bankruptcy despite all the hard work that she may have
put into it.

Larger enterprises are able bring many more of these linkages inside the enterprise and through
investments in design and market research can establish a measure of control and predictability
even over those linkages outside the enterprise. Large enterprises also tend to have multiple
products and diverse revenue streams so that even if one fails there are several others in the
portfolio to provide support to the company. All of these capabilities are out of reach for SMEs.

So what are the characteristics of a well performing SME? We think that there are three:

1. Competitive Advantage Characteristic: A sustained source of competitive advantage that

forms the core basis of the enterprise.
2. Local Risk Management Characteristic: The operating and financial ability to manage local
(idiosyncratic) risks – sufficient skills and an adequate amount of equity capital to address
local uncertainties and disruptions.
3. Low Systematic Risk Characteristic: Low exposure to external (systematic) risk factors.

For such SMEs securing finance from local financial institutions becomes relatively straight forward
because the financiers are easily able to evaluate the first two factors and since it is low, do not have
to worry about the third. Such an SME also does not need any external equity investments because
the relatively modest amount of equity capital needed to manage local risks can be supplied by her
from her own resources or obtained from friends and family. It would be ideal if all the SMEs in the
country met these three criteria -- they would not need any external support for their growth and
nor would ensuring access to finance be such a challenge. However the reality is very different and
while the first two characteristics are essential for the survival and growth of the SME, even when
they are to be found in abundance, it is the third factor that becomes the Achilles heel for the
enterprise. In our view there is no way to build a successful SME without the first two characteristics
being present but we feel that it may be possible to design interventions which are able to create
the third feature even for those SMEs which initially start out with high exposure to systematic risk
factors.

In the context of a rural enterprise, in the following sections we will explore more carefully each of
the three factors with particular attention being paid to the third factor. The core of the NEF
strategy is that it tries to address the third factor for those rural enterprises which satisfy the first
two criteria and thus ensure access to debt finance for them.

Potential Sources of Competitive Advantage for Rural SMEs

The question here is, when faced with fierce completion from, say, the Chinese or by machine made
products in large urban factories, what are the potential sources of competitive advantage for rural
enterprises? In our view there are five:

1. Absolute Premium Advantage: Willingness of rural consumers to pay an absolute premium

relative to an urban consumer for essential services (credit, clean drinking water, health care,
high quality energy).

2. Labour Cost Advantage: Willingness of rural producers to supply labour at a low marginal cost in
exchange for at-home work and flexible hours (craft, foods, dairy).

3. Proximity Advantage: Proximity of rural producers to consumption centres ensuring enduring

transportation cost advantages relative to producers located further away from the
consumption centres. These could be the village itself as the consumption centre or the nearby
city (rural private schools, rural home-stays, craft, foods, dairy)

4. Local Feature Advantage: Some inalienable features of the personality or the locality such as
attractive locales and / or traditional skills and craftsmanship (craft, foods, rural home-stays).
5. Set-up Time Advantage: Low set-up times leading to the ability to produce custom designed
goods for markets of one (rural home stay, craft, foods).

This means that enterprises that meet one or more of these five criteria have a source of sustained
competitive advantage that can form the basis of the future success of the enterprise.

Ability to Manage Local Risks

These are risks that are within the direct control of the local entrepreneur and if controlled well
allow the entrepreneur to fully benefit from her core competitive advantages. And, should a local
financial institution be willing to spend the time, these are risks that are relatively easy for them to
evaluate and monitor. These are also risks for which the local entrepreneur is able to find the
relevant quantum of equity capital from personal sources. So what are some of these risks?

1. Operational Risks: these principally to do with ensuring that the enterprise is well run, the staff
show up, premises are clean, machines well oiled and the team has the necessary skills to run
the enterprise. The skill requirements tend to be low and if the entrepreneur puts her mind to
she is able to learn them fairly quickly even if she did not start out with them.

2. Local Demand Risks: If the product or the service has exclusively a local market then the
entrepreneur would have to ensure that there is an adequate local demand and that the
enterprise has just about the adequate capacity to meet this demand.

3. Local Equity Risks: No matter how well run there will be days on which the staff do not show up
or the raw material shipment does not arrive on time. The entrepreneur will need to have an
adequate financial buffer to continue to service her fixed obligations even when these events
occur.

4. Margin Risk: In view of their local character these SMEs are likely to face relatively high cost of
funds and would expect to deliver a relatively high return on equity. Its sources of competitive
advantage should be such that despite these high costs it is able to meet the high return on
equity expectations of its promoters. Estimates of cost of funds may be as high as 30% per
annum and the expected returns on equity after meeting those and other costs would need to
be in the neighbourhood of 100% per annum.

External Risks

These are risks that are not under the direct control of the local entrepreneur and are generally of a
magnitude that can easily threaten the viability of even a well run SME with strong core sources of
competitive advantage. These risks could include:

1. External Finished Product Exposure: External demand and price risk for the finished product.
2. External Raw Material Exposure: Supply and price risk for raw materials to be sourced from
outside.
3. Advanced Skills Exposure: Supply and price risk for advanced skills that may be needed.
4. Technology Exposure: Supply and price risk for advanced technology and knowledge that may be
needed.
5. Environmental Risk Exposure: Environmental risks such as rainfall or earthquake.
6. Catastrophic Risk Exposure: Catastrophic risks such as the death of the entrepreneur or fire in
the enterprise.
These risks are such that they need to managed directly and cannot be addressed even with large
doses of equity capital made available to the SME. These are also risks that deter lenders from
supplying loan funds to those SMEs that have a high exposure to these risks. Some of these risks,
such as earthquake, rainfall, agricultural commodity price movements, death or fire can be easily
addressed through financial insurance products relatively easily available in the market and made
accessible to the entrepreneur through their local financial institution. But the other risks needs
more carefully designed interventions outside the world of finance. The net outcome of all of these
risk management strategies is however identical – they convert external uncertainties which are not
quantifiable into quantifiable risks at the first stage and at the second stage convert these
quantifiable risks into a fixed charge – the insurance premium or the guarantee fee.

The Network Enterprises Approach

As has been mentioned earlier, the Network Enterprises Fund (NEF) managed by IFMR Ventures has
been set up to address precisely this last category of external risks and to find ways to provide a
guarantee or insurance to the local entrepreneur against these risks in exchange for a guarantee fee
or risk premium. In order to develop an investment pipeline for the NEF, IFMR Ventures follows a
five step approach:

1. Identify sectors in which, in their view, the rural enterprise has core competitive advantages on
account of the one of one or more of the factors listed earlier. In its initial assessment there
were several such sectors:

i. Agriculture
ii. Craft, Apparel and Furnishings
iii. Dairy
iv. Fast Moving Consumer Goods manufactured by rural producers.
v. Skills training
vi. Inbound Rural Tourism
vii. Purified Drinking Water
viii. Rural Energy
ix. Rural Private Schools
x. Rural Health Care
xi. Rural Business Process Outsourcing
xii. Rural Internet Access Points

2. For each sector examine carefully the ability of a large number of current or potential rural
entrepreneurs to address local risks, to run and manage the enterprise and to supply the
requisite amount of equity capital needed to address local risks, without the need for ongoing
support from the outside.

3. Identify the exposure of these sectors to external risks and assess whether it is possible to find
ways to least convert the uncertainties into quantifiable risks and from there gradually to move
to a situation where a firm insurance type contract can be offered to the SME (discussed later).

4. Incubate one organization for each sector that meets all of the above tests, which is dedicated to
addressing these external risk exposures of the specific sector. The attempt is to incubate
organizations that will be able to do this using a very small amount of capital and should have
the potential to deliver at least 100% return on that capital. Each of these organizations is
referred to as a Network Enterprise.
5. If the Network Enterprise is able to meet milestones which establish its viability, its capacity to
have nation-wide impact and its potential to deliver 100% return on equity, then IFMR Ventures
recommends the Network Enterprise to the Investment Committee of the Fund for investment
by the Network Enterprises Fund.

Quantification and Insurance

The core task for Network Enterprises is to move SME from exposure to systematic uncertainties as
a first step to quantifiable risks and then progressively to fixed prices insurance. The strategy to do
this while potentially common across sectors is specific to each source of uncertainty:

1. Aggregation to Address External Finished Product Exposure: This is exposure to external demand
and price risk for the finished product. This a dominant form of exposure for products and
services that are made in rural areas and are sold in urban areas. The core strategy to address
this risk would be aggregate national / regional demand and find a way to connect it to rural
suppliers. The underlying belief is that if a sufficient quantum of demand is aggregated and the
producer is competitive in the manner that we have defined earlier, while each demand point
may have different interests and needs, the process of aggregation would eliminate / reduce the
uncertainty and lend a measure of quantifiability to the demand. It would do so primarily by
eliminating the search process and bringing together a sufficient number of demand points that
are interested in the precise product-price offering of the SME. In the case of commoditised
products for which liquid markets exist while selling may not be as much of a problem,
connecting the SME to the liquid market and making available price risk management tools
through a local financial institution (the LFI may need design support from the NE) may be the
required intervention.

2. Information to Address External Raw Material Exposure: This is exposure to supply and price risk
for raw materials to be sourced from outside. This is a source of risk for SMEs that are either
selling into local markets or adding value to the raw material and then reselling into urban
markets. Here while the supply in an absolute sense is unlikely to be a problem the challenge is
more information asymmetry in which the SME is relatively uninformed about the quality of raw
materials. Here the Network Enterprise would focus on certification as a core strategy to reduce
/ eliminate this uncertainty. In the case of commoditised products for which liquid markets exist
while purchasing may not be as much of a problem, connecting the SME to the liquid market and
making available price risk management tools through a local financial institution (the LFI may
need design support from the NE) may be the required intervention.

3. Warehousing to Address Advanced Skills Exposure: This is exposure to uncertainties associated

with the supply and cost of advanced skills that may be needed for particular SMEs. The NE
here would need to build a very carefully constructed set of links to the sources of advanced
skills (in some cases building them in-house) and then making them available for a fixed /
variable fee to the SME.

4. Ownership to Address Technology Exposure: This is the supply and cost uncertainties associated
with advanced technology and knowledge that may be needed by the SME. The NE here would
need to potentially own / license the relevant technology and develop in-depth capability in that
area and then make this available for a fixed fee to the SME either on a re-licensing or build-
operate-transfer (BOT) or build-operate-own (BOO) basis.
5. Derivatives to Address Environmental Risk Exposure: These are exposure to environmental
hazards such as rainfall or earthquake. The NE would need to work closely with an LFI to make
such derivatives available to the SME for a fixed price.

6. Insurance to Address Catastrophic Risk Exposure: These are exposures that arise on account of
the death of the entrepreneur or fire in the enterprise. The NE would need to work closely with
an LFI to make such insurance products available to the SME for a fixed price.

Current Status

The incubation effort of IFMR Ventures began in January 2008 and thus far it has created the
following Network Enterprises:

i. Agricultural Terminal Markets Network Enterprise (ATMNE)

ii. Craft, Apparel and Furnishings Network Enterprise (CAFNE)
iii. Dairy Network Enterprise (DNE)
iv. Vocational Training Network Enterprise (VTNE)
v. Rural Tourism Network Enterprise (RTNE)
vi. Rural Drinking Water Network Enterprise (RDWNE)
vii. Rural Energy Network Enterprise (RENE)
viii. Rural Private Schools Network Enterprise (RPSNE)

The status of each of these enterprises is discussed in the annexures but thus far there have been no
investments made by the Network Enterprises Fund. It is expected that Rural Tourism Network
Enterprise (RTNE) will be the first one to make the grade.

Conclusion

It may be seen from the annexures that converting these insights into viable Network Enterprise
business models has been much harder than had originally been anticipated when the NEF was
created and despite over two years having passed since its launch, the NEF has not yet been able to
make a single investment. However, in our view it is too early to conclude if this effort has been
successful or not. Many of the incubated entities have provided us with valuable product insights
such as warehouse receipt finance for small farmers and control of moral hazard in livestock
insurance for owners of one or two animals.

In some sectors such as rural healthcare, rural business process outsourcing, rural internet kiosks
and fast moving consumer goods manufactured by rural producers IFMR Ventures has not even
attempted to create Network Enterprises or shut them down soon after creation because despite
manifest opportunities we could not identify successful Network Enterprise business models1.

Sectors such as rural tourism, drinking water, rural energy, dairy and agricultural terminal markets
continue to look very promising despite some pretty serious operating problems facing most of
them. Given the urgent need for viable options here and manifest competitive advantages of rural

1
In an early attempt to build a prototype of a Network Enterprise for the FMCG sector IFMR Trust, the parent
company of IFMR Ventures, did invest in a company: Earthy Goods which has been very successful in
addressing the high quality-high price segment but chose not to become a sector wide Network Enterprise.
After this first attempt given that the in these products which are often foods and personal care products
there are some pretty strong phyto-sanitary requirements, IFMR Ventures concluded that perhaps this is not a
segment in which the rural SME can be competitive except in the very niche areas being pursued by companies
such as Earthy Goods and Fab India.
producers in these sectors, we remain hopeful but it is not yet clear to us if in sectors such as craft,
vocational training and rural private schools whether we will indeed be able to arrive at successful
Network Enterprises.
 Annexure 1
Agricultural Terminal Markets Network Enterprise (ATMNE)

1. Typical SME: a small farmer growing any crop on a patch of land less than once acre in size. This
farmer has been in the business of farming for several generations and is well experienced in the
local weather patterns, soil conditions, markets and typically uses the jewellery at home as
collateral to borrow money for inputs.

2. Competitive Advantage Characteristic:

a. Absolute Premium Advantage: Since the crops are like to be locally grown and easily
available it is unlikely that this advantage would be available to SME. There is clearly
however an opportunity for the SME to improve their productivity.

b. Labour Cost Advantage: Since this is a family occupation and carried out seasonally there
is a willingness to work the farm with in-house labour so no explicit cost of labour needs
to be built in.

c. Proximity Advantage: The crop is typically grown in the region so consumption centres /
purchasers have typically evolved around it providing the proximity advantage.

d. Local Feature Advantage: Since the crop has been successful y grown in the region for a
number of generations it is perhaps the case the local agro-climatic zone and soil
conditions are suited to this crop.

e. Set-up Time Advantage: Since the farmer is a small farmer and not farming with a great
deal of capital intensity, for her to switch rapidly from crop to crop to provide for
changes in local demand patters and seasonality potentially exists though it is possible
that she may need some training to effect these changes.

3. Local Risk Management Characteristic:

a. Operational Risks: Since this has been a family occupation for several generations the
ability to manage these risks should be relatively easy to assess. Former wage labourers
who are given land are reported to have difficulty in managing operational risks but
otherwise this should not be a problem.

b. Local Demand Risks: Since this is a small farm and selling largely into a local market there
is likely to be good ability to manage local demand risks. However, there may well be
external risk components determining the price of the commodity which may be difficult
for the SME to address.

c. Local Equity Risks: Ownership of the land itself and the availability of local assets such as
jewellery could provide an adequate source of equity to address local risks for the
farmer.

d. Margin Risk: Despite the high cost of funds that these SMEs often face, if the systematic
factors are well controlled (discussed later) then they have the potential to return over
100% on their investments even in low value crops.

4. Low Systematic Risk Characteristic:

 There are unfortunately several systematic risks that the SME faces in this sector and if not
controlled properly these can swamp even the 100% return on equity potential that the SME
has.

a. External Finished Product Exposure: while the crop is a relatively standardised crop
there are several risks that the SME faces here, including, price fixing by local traders,
poor weighing procedures, pressure to sell at distress prices because of inability to time
the sale optimally, unexpected movement in commodity prices between sowing and
harvesting.

b. External Raw Material Exposure: Here often the supply of high quality inputs such as
seeds and fertilizers is reported to be a problem but since prices of several inputs are
heavily subsidised there does not seem to be much raw material price risk.

c. Advanced Skills Exposure: In most basic crops there isn’t an advanced skills exposure
but if the SME decides to enter into the production of high value and very sensitive
crops this exposure could be high.

d. Technology Exposure: In several areas this is reported to be high – particularly as far as

production technology is concerned. SMEs are often deeply wedded to traditional
methods that have served them well and in fact are the reason why they are deemed to
be competitive in the first place. However, this also prevents them from benefitting
from newer crop production technologies.

e. Environmental Risk Exposure: These SMEs have moderate exposure to year to year
fluctuations in rainfall patters but are very exposed to severe flooding and droughts.

f. Catastrophic Risk Exposure: The risk of death of the cultivator is indeed an ever present
risk for the SME.

5. The Agricultural Terminal Market Network Enterprise (ATMNE):

After much brainstorming IFMR Ventures decided to incubate the ATMNE to focus on the
systematic risk factor of External Finished Product Exposure. There appeared to be no easy way
to address the challenges of External Raw Material Exposure, Advanced Skills Exposure and
Technology Exposure and the challenges of Environmental Risk Exposure and Catastrophic Risk
Exposure, it was felt could be addressed relatively easily through a local financial institution.

The ATMNE decided to focus its attention on building viable linkages between the small farmer
and electronic exchanges as a way to mitigate price risk and allow the SME to separate the
harvesting and delivery process from the selling process by introducing the concept of an
exchange accredited warehouse and an electronic warehouse receipt into the picture. This
separation would also allow the SME to not have to undertake distress sale since the farmer
would be able to delay the selling of their crop to a more optimal time by taking on warehouse
receipt finance against the electronic receipt and purchasing hedges from a local financial
institution for the commodity price.
 Annexure 2
Craft, Apparel and Furnishings Network Enterprise (CAFNE)

1. Typical SME: a small artisan (or a group of them) or weaver making low to mid quality small
carpets or mats or clothes, generally at home, for sale in urban markets. This artisan is
pursuing a family occupation and is very familiar with traditional production methods and
traditional designs.

2. Competitive Advantage Characteristic:

a. Absolute Premium Advantage: Since this product is designed for sale in the urban
market this advantage is unlikely to obtain.

b. Labour Cost Advantage: Since this is a family occupation and often carried out in
between farming and other household chores, the family is willing to supply labour
at a very nominal cost for this effort as long as there is some positive return on the
financial investments made.

c. Proximity Advantage: For villages that are located near large to mid-sized towns this
is a definite source of competitive advantage since transportation costs for these
products could be considerable. Also, at least to some extent, the consumers are
familiar with the locally made product and the producers have at least a broad sense
of what the demand is likely to be.

d. Local Feature Advantage: This often the strongest suite for this SME. The craft is
often inalienably associated with the local geography and the methods of
production and designs are handed down from generation to generation in that
area. It is also possible that the raw materials and the dyes necessary for this
production as well as the entire eco-system in which the SME is embedded are
available only here.

e. Set-up Time Advantage: Since the SME is a small producer it is capable of

accommodating an enormous amount of variety in demand and effecting changes in
designs and fabric relatively quickly in response to market conditions.

3. Local Risk Management Characteristic:

a. Operational Risks: Since this has been a family occupation for several generations
the ability to manage these risks should be relatively easy to assess. However, since
this is most often a home based occupation for the women that are engaged in the
actual product process there is often a difficulty in actually predicting output and
meeting time lines. The skill levels and the attention paid to the task can vary
considerably from one household to the next and therefore guaranteeing
production of a certain quality and quantity can sometimes be very challenging.

b. Local Demand Risks: These products are sold in urban markets and there is likely to
be at best modest demand for the products in local markets. This risk cannot said
therefore to be very material.

c. Local Equity Risks: Ownership of the equipment (for example the loom) and the fact
that this is a part-time occupation for those involved provides a measure of risk
 protection to the SME from local risks. Often the producers are able to access
personal loans using Joint-Liability Group (JLG) structures and that can provide the
modest amount of equity capital needed to manage local risks.

d. Margin Risk: Despite the high cost of funds that these SMEs often face, if the
systematic factors are well controlled (discussed later) then they have the potential
to return over 100% on their investments even in low value added craft production,
particularly when this is being pursued as a supplemental occupation. It is less
obvious that on a full-time basis and with a higher level of capital investment this
can provide similar returns.

4. Low Systematic Risk Characteristic:

There are unfortunately several systematic risks that the SME faces in this sector and if not
controlled properly these can swamp even the 100% return on equity potential that the SME
has.

a. External Finished Product Exposure: this is perhaps the most important risk that the
SME faces – the inability to sell their production except sporadically and in meagre
quantities. Highly successful efforts such as Fab India have been able to reach only
about 40,000 artisans and achieve a turnover of under Rs. 3.00 billion. And, in order
for the artisan to qualify to sell to Fab India the quality standards imposed by them
are of an order that it is impossible for most of the SMEs in this category to meet.

b. External Raw Material Exposure: While in some categories of craft this may indeed
be a risk for most of the products in the low-price-low-quality segment this is not a
significant risk.

c. Advanced Skills Exposure: Once again not a material risk factor in the low-price-low-
quality segment.

d. Technology Exposure: Not a material risk factor.

e. Environmental Risk Exposure: Not a material risk factor.

f. Catastrophic Risk Exposure: The death of the artisan or a fire in the workshop is
indeed an ever present risk for the SME.

5. The Craft, Apparel and Furnishings Network Enterprise (CAFNE):

IFMR Ventures has incubated the CAFNE to focus exclusively on the challenge of finding reliable
market access channels for small producers of various kinds of craft. Unfortunately the only
formats through which the kind of low-quality-low-price products made by these SMEs are sold
are bulk formats which require high levels of standardisation. Supplying to these bulk formats
has proved to be impossible for the SMEs. CAFNE has recently tied up with www.indiamart.com
to set up a dedicated internet based sales channel for these SMEs in the hope that a larger
selection of buyers may be willing to take up the relatively higher degree of variety and smaller
quantities that are feasible for these SMEs to offer at any given point in time.
 Annexure 3
Dairy Network Enterprise (DNE)

1. Typical SME: a household with a small number of either buffalos or cows producing milk for
self-consumption as well as for sale in the open market. The animals are cared for by a
member of the family on a part-time basis.

2. Competitive Advantage Characteristic:

a. Absolute Premium Advantage: Since this is a commoditised product this advantage

is unlikely to obtain. However there is a considerable scope for improvement in
productivity of the animals.

b. Labour Cost Advantage: Since this is a family occupation and often carried out in
between farming and other household chores, the family is willing to supply labour
at a very nominal cost for this effort as long as there is some positive return on the
financial investments made.

c. Proximity Advantage: For villages that are located near large to mid-sized towns this
is a definite source of competitive advantage since transportation costs for liquid
milk is considerable – it needs to be transported in a chilled state and long-distance
transportation adds considerably to the cost of the milk.

d. Local Feature Advantage: This is a commoditised product and unlikely to have a

specific local flavour that could be advantageous.

e. Set-up Time Advantage: While we understand that small herds are more efficient in
terms of environmental impact there is no set-up time advantage that is apparent
here.

3. Local Risk Management Characteristic:

a. Operational Risks: There is a view that for first time owners these risks could be
considerable since the animals need to be cared for on a regular basis. However, it
is a relatively low skilled occupation and with a little bit of effort most families are
able to acquire the needed skills.

b. Local Demand Risks: Since the milk is sold largely in urban markets and there is
likely to be at best modest demand for it in local markets. This risk cannot said
therefore to be very material.

c. Local Equity Risks: Since this is a part time occupation the cash-flows from other
occupations provide the necessary equity support. Often the producers are able to
access personal loans using Joint-Liability Group (JLG) structures and that can also
provide the modest amount of equity capital needed to manage local risks.

d. Margin Risk: Despite the high cost of funds that these SMEs often face, if the
systematic factors are well controlled (discussed later) then they have the potential
to return over 100% on their investments even with low yielding animals,
particularly when this is being pursued as a supplemental occupation. With a larger
and higher yielding herd of animals even on a full-time basis and with higher levels
 of capital investment the SME has the potential to deliver over 100% return on
investment.

4. Low Systematic Risk Characteristic:

While overall the systematic risk exposure is low if there is a desire to increase both the size and
quantum of returns a considerable amount of effort has to be invested in improving the
productivity of the animal. There are also a few other risks that need to be managed for a
successful long-term operation.

a. External Finished Product Exposure: The most important challenge here is the
productivity of the animal as well as a good price realisation for the milk.

b. External Raw Material Exposure: If the SME is interested in improving the

productivity of the animal then purchase of a good quality animal as well as other
inputs becomes an important risk factor to be controlled.

c. Advanced Skills Exposure: This is a fairly low-skilled operation so this is not a

material risk.

d. Technology Exposure: There is scope for deployment of better technologies in areas

such as milking but given the low cost at which the SME is able to access the family
labour pool, it not advisable for the SME to invest in these technologies. Therefore
this is not a material risk factor.

e. Environmental Risk Exposure: Since the animals need to be fed green fodder there
is indeed some exposure to rainfall risk but for smaller herds the belief is that even i
very difficult times the required quantum of green fodder can be found. This is
therefore not a material risk factor.

f. Catastrophic Risk Exposure: The death of the animal(s) is indeed an ever present
risk for the SME.

5. The Dairy Network Enterprise (DNE):

After much debate it was felt that the most appropriate Network Enterprise intervention would
seek to bring health care and productivity improvement services to the SMEs. The supply of
trained veterinarians and lay workers who could assist them at the village level was thought be
the most important impediment that this effort would address.

The livestock insurance itself can easily be provided by a local financial institution but the DNE is
also required here for the mandatory tagging, de-worming and vaccination of insured animal.
 Annexure 4
Vocational Training Network Enterprise (VTNE)

1. Typical SME: a village level training, career guidance and job placement kiosk for providing
basic vocational training to rural youth.

2. Competitive Advantage Characteristic:

a. Absolute Premium Advantage: These services are not easily available in rural areas
and would be considered very valuable by the local population and there would be a
willingness to pay a substantial premium for these services.

b. Labour Cost Advantage: This is a full time responsibility for the staff employed there
and while given the fact that it is a rural area the costs may be lower this is unlikely
to offer a big advantage to the SME.

c. Proximity Advantage: Since the demand for these services is expected to be entirely
local clearly this is a big advantage to the SME relative to vocational training centres
located in urban areas.

d. Local Feature Advantage: Since this training is likely to be provided for jobs in urban
locations this is not an advantage that will help the SME. On the other hand it is
possible that the inability of village youth to speak English or to dress in a manner
that is acceptable to urban environments may well be a disadvantage that the SME
will try and overcome through its training efforts.

e. Set-up Time Advantage: While the SME may be able to offer only a standardised
training programme without too much customisation since the programme is likely
to be very basic it is possible that their students may be absorbed into a variety of
occupations in urban areas.

3. Local Risk Management Characteristic:

a. Operational Risks: This is likely to be a new business for the entrepreneur and it is
not clear if she will have the operational capability to operate this business. A
serious selection and training effort will need to be mounted to identify the
appropriate entrepreneur.

b. Local Demand Risks: There is also a significant demand risk here since it is not clear
if rural youth will be interested in these opportunities sufficiently to be willing to pay
for them.

c. Local Equity Risks: Given high levels of operational risks and local demand risk there
is likely to be a high level of local equity risk and it may be difficult for a local
entrepreneur to seek loan funds beyond some degree of equipment finance. The
local entrepreneur may need therefore to bring in a high level of local equity.

d. Margin Risk: Margin risk here is also likely to be considerable and it is not clear if the
100% return on equity benchmark is likely to met here.
4. Low Systematic Risk Characteristic:

There are unfortunately several systematic risks that the SME faces in this sector which need to
be controlled.

a. External Finished Product Exposure: While the demand for the SMEs services is
entirely local, it is likely to be the case that unless the SME is able to demonstrate a
successful track-record of placement for its graduates in urban locations the local
demand will vanish completely. This is perhaps the most important risk to control.

b. External Raw Material Exposure: If the SME relies on machines to help it offer these
courses, it is likely to be dependent on the supply of these machines, operations and
maintenance services as well as electricity supply. These are risks that the SME
would need to control.

c. Advanced Skills Exposure: Since this is not a locally available skill training to offer
these training programmes would need to be provided by an external partner.

d. Technology Exposure: If the training programmes are being offered using a

technology platform this exposure is also likely to be present.

e. Environmental Risk Exposure: Not a material risk factor.

f. Catastrophic Risk Exposure: The death of the trainer or a fire in the training centre is
indeed an ever present risk for the SME.

5. The Vocational Training Network Enterprise (VTNE):

 Annexure 5
Rural Tourism Network Enterprise (RTNE)

1. Typical SME: A small one to two roomed facility either inside the home of a villager or on
her property priced at under Rs. 500 per room-night.

2. Competitive Advantage Characteristic:

a. Absolute Premium Advantage:

b. Labour Cost Advantage:

c. Proximity Advantage:

d. Local Feature Advantage:

e. Set-up Time Advantage:

3. Local Risk Management Characteristic:

a. Operational Risks:

b. Local Demand Risks:

c. Local Equity Risks:

d. Margin Risk:

4. Low Systematic Risk Characteristic:

a. External Finished Product Exposure:

b. External Raw Material Exposure:

c. Advanced Skills Exposure:

d. Technology Exposure:

e. Environmental Risk Exposure:

f. Catastrophic Risk Exposure:

5. The Rural Tourism Network Enterprise (RTNE):

 Annexure 6
Rural Drinking Water Network Enterprise (RDWNE)

1. Typical SME: A small water purification plant capable of supplying purified drinking water to
an entire village of about 2,000 households.

2. Competitive Advantage Characteristic:

a. Absolute Premium Advantage:

b. Labour Cost Advantage:

c. Proximity Advantage:

d. Local Feature Advantage:

e. Set-up Time Advantage:

3. Local Risk Management Characteristic:

a. Operational Risks:

b. Local Demand Risks:

c. Local Equity Risks:

d. Margin Risk:

4. Low Systematic Risk Characteristic:

a. External Finished Product Exposure:

b. External Raw Material Exposure:

c. Advanced Skills Exposure:

d. Technology Exposure:

e. Environmental Risk Exposure:

f. Catastrophic Risk Exposure:

5. The Rural Drinking Water Network Enterprise (RDWNE):

 Annexure 7
Rural Energy Network Enterprise (RENE)

1. Typical SME: A small local retailer of rural energy products and services.

2. Competitive Advantage Characteristic:

a. Absolute Premium Advantage:

b. Labour Cost Advantage:

c. Proximity Advantage:

d. Local Feature Advantage:

e. Set-up Time Advantage:

3. Local Risk Management Characteristic:

a. Operational Risks:

b. Local Demand Risks:

c. Local Equity Risks:

d. Margin Risk:

4. Low Systematic Risk Characteristic:

a. External Finished Product Exposure:

b. External Raw Material Exposure:

c. Advanced Skills Exposure:

d. Technology Exposure:

e. Environmental Risk Exposure:

f. Catastrophic Risk Exposure:

5. The Rural Energy Network Enterprise (RENE):

 Annexure 8
Rural Private Schools Network Enterprise (RPSNE)

1. Typical SME: A rural school run privately which charges a fee per student of under Rs. 300
per student per month.

2. Competitive Advantage Characteristic:

a. Absolute Premium Advantage:

b. Labour Cost Advantage:

c. Proximity Advantage:

d. Local Feature Advantage:

e. Set-up Time Advantage:

3. Local Risk Management Characteristic:

a. Operational Risks:

b. Local Demand Risks:

c. Local Equity Risks:

d. Margin Risk:

4. Low Systematic Risk Characteristic:

a. External Finished Product Exposure:

b. External Raw Material Exposure:

c. Advanced Skills Exposure:

d. Technology Exposure:

e. Environmental Risk Exposure:

f. Catastrophic Risk Exposure:

5. The Rural Private School Network Enterprise (RPSNE):