Financing the Unseen: Blended Finance for Nano Enterprises[1]
Blended Finance (BF) has been steadily gaining traction in India over the past decade, with a growing number of players deploying it to bridge funding gaps in critical sectors. Between 2010 and 2023, approximately ₹14,490 Crores ($1.7 Billion) has been deployed towards expanding credit access, so far impacting close to 30 lakh beneficiaries[2]. Financial inclusion as a thematic area accounts for approximately 30% share in the total blended finance capital deployed in India, highlighting its growing relevance in addressing credit gaps. Nano entrepreneurs, who comprise a significant proportion of last-mile borrowers and the underserved segment are a crucial segment of beneficiaries in the blended finance space. This is so because on the supply side lending to nano entrepreneurs is considered a risky endeavour by Financial Service Providers (FSPs) and on the demand side access to affordable formal credit proves challenging for nano entrepreneurs, creating the right opportunity for BF instruments to exist. Given this context, the objective of this blog is to articulate the scope and relevance of various BF instruments in advancing access to suitable credit[3] for nano entrepreneurs.
What are Nano enterprises?
Nano-enterprises are ubiquitous in rural and urban India with typical examples of kirana stores, textile & garment retailers, hardware shops, dairies, etc. They are largely informal businesses with a significant majority primarily dealing in cash transactions. Most of them are own-account enterprises[4] and often rely on family members for labour and day-to-day operations. Nevertheless, they display considerable heterogeneity, with enterprises ranging from subsistence level operations to emerging growth-oriented ones. The vast majority of these enterprises have an annual turnover of less than ₹1 crore with a heavily skewed distribution, as nearly 94% of nano enterprises have turnovers below ₹25 lakh[5]. They primarily need credit for working capital and to expand their business activities[6]. Many nano enterprises operate on thin profit margins, making them particularly sensitive to the cost of credit. As a result, high interest rates are often unsustainable and can undermine their financial viability and long-term growth prospects.
Without a digital trail or formal cash flow records, these businesses struggle to demonstrate their creditworthiness to formal financial institutions. Additionally, the absence of collateral makes securing loans even more challenging. Financial institutions perceive this segment as high-risk, leading to costly lending terms. Moreover, the high operational cost of servicing these borrowers due to the need for high-touch distribution channels and/or due to high customer acquisition costs combined with small loan sizes result in low margins and make for poor unit economics for FSPs, disincentivizing them from serving this segment. As a result, only a fraction of the 7.3 crore nano enterprises in India are able to access formal credit and this excludes particularly those who are New to Credit or have thin credit files, limiting their growth opportunities.
Role of Blended Finance in enabling suitable credit for nano enterprises
Blended Finance is a structuring approach that uses catalytic capital from public or philanthropic sources to increase private sector investment in emerging and frontier markets[7]. Primarily, it uses capital from public or philanthropic sources to improve the risk-return profile of an investment, making it more attractive to private investors[8]. Hence, the role of Blended Finance, in this context is to de-risk nano entrepreneurs, enabling the emergence of a credit market that can: i) provide suitable credit to nano enterprises and ii) create opportunities for new players with innovative lending models to enter.
A typical blended finance transaction consists of three parties. First, a philanthropic investor provides catalytic capital, accepting lower or even zero returns in order to de-risk the project. This, in turn, attracts commercial investors who contribute upfront funding with the expectation of market-level returns. An intermediary manages the project’s implementation, ensuring that funds are used effectively and that all stakeholders are coordinated. The final party consists of the recipients i.e. nano entrepreneurs in this context, who benefit from the various interventions facilitated through blended finance instruments. BF structures can be broadly classified into the following models: i) Credit Guarantees ii) Concessional Financing iii) Grants and Technical Assistance iv) Result Based Financing, and v) Structured Finance Instruments and a brief overview of each type of BF instrument is provided in the footnote.[9] [10] [11] [12] [13]
Learnings from deploying Blended Finance structures for nano enterprise credit
A review of existing BF structures executed in the context of nano-enterprise credit in India shows that the primary goal of blended finance instruments in this domain has been to increase the flow of credit to the informal segment. For instance, Credit Guarantees, have demonstrated a leverage of 2.5 to 3, meaning that each rupee of catalytic capital under this structure has mobilized ₹2.5 to ₹3 of commercial capital toward lending in this space[14]. Further, the deployment of Social Success Notes has worked in reducing the blended cost of funds for borrowers and has helped accelerate financial inclusion by incentivizing risk-taking and greater capital flows to underserved population groups such as women nano entrepreneurs[15]. Blended finance mechanisms aim to make borrowers who are typically excluded from traditional finance more “bankable” with lenders utilising these structures to develop sustainable lending portfolios for this segment over the long term. Moreover, BF instruments in theory have considerable potential in bringing down the pricing of loans for last-mile borrowers although real world implementations offer mixed results. The performance of different BF instruments varies, and each has its own set of nuances. A broad summary of our learnings by each BF type is provided below:
- Credit Guarantees: Guarantees are the most popular BF instrument in the Indian context, featuring in one out of every two closed BF transaction. Guarantees as structures can be easily replicated across different geographies and contexts, and are easily understood by the financial services industry. While these instruments have helped increase the flow of credit to specific sectors, it remains to be seen whether they can also contribute to bringing down the interest rate on loans in the medium to long term. Moreover, differing expectations around impact metrics can create misalignment between FSPs and guarantee funders resulting in stalled negotiations or failed agreements. Therefore, there might be merit in building greater transparency towards (i) understanding whether the defined target segments are being covered and (ii) documenting how guarantees are affecting default rates at the individual FSP level and therefore their potential effect on the firm’s final lending rate policy.
- Concessional financing structures are also prominent in the Indian BF space. These structures can lower the cost of funds significantly for lenders, potentially leading to lower interest rates for borrowers. However, in order to ensure that the benefits are passed on directly to last-mile borrowers, specific clauses need to be embedded in these structures to ensure that FSPs are reducing at least a portion of the final rate at which they lend to borrowers. A prominent example of this structure is the use of philanthropic capital alongside commercial investors in lending. In this model, philanthropic capital is provided at low or zero interest rates, which effectively reduces the overall cost of capital for the lender, resulting in a lower final interest rate for the borrower.
- Grants too are suitable for providing affordable credit to small-scale enterprises. However, the scale of these models is questionable given the limited availability of these funds and the overall competition for philanthropic capital from various market players. Therefore, grants and technical assistance are best used for driving innovation. For example, grants could be issued to FSPs to pilot and test new or alternative approaches to underwriting and other innovations aimed at reducing operational costs of the sector.
- In the Indian context, several Social Success Notes (SSN) have been deployed that enable direct interest rate subventions to last-mile borrowers, hence proving to be effective in creating avenues for affordable sources of debt (from borrower perspective). SSNs have the added advantage of avoiding any negative externalities, i.e., SSNs do not disrupt the loan market dynamics as rewards are given for good customer behaviour (for example- 30% loan is waived in the form of interest subvention once customers have repaid 70% of the loan). However, implementing such an outcome-based financing can be complex, time-consuming, and costly.
- Finally, structured financing instruments are designed with the intention of attracting commercial capital at scale and increasing the capital market footprint of those FSPs that would otherwise lack access to capital due to low credit rating. In the long term, the cost of borrowing for these FSPs could come down as a result of participating in the securitisation processes, or other debt-based funds. However, sector experts reveal high regulatory barriers in operationalising these structures. In the Indian context, regulatory guidelines prevent priority distribution within Alternate Investment Fund structures, i.e., tranching of funds into senior and junior funds with differential rewards and risk ratios are typically not allowed[16] [17]
Concluding Remarks
Blended finance models remain well-suited for areas where impact is linked to growth of customer base and for projects with higher risk tolerance or where risk assessment is challenging. Such sectors for investment have a target market that is still developing with no commercially viable models of funding available yet. As these sectors develop and become more commercially viable, private investors will be increasingly inclined to invest without relying on concessional capital or guarantees. This could lead to a natural exit for blended finance instruments as a viable market of capital providers and their target end-users emerge. Nevertheless, the Indian BF sector is still at a relatively nascent stage. Given the learnings emerging from more than a decade of experience in deploying BF instruments in India, the sector collectively has the requisite expertise to convert these learnings into actionable items and mobilize relevant partners for implementing necessary changes. We believe that the following action points can improve the scope of BF models on last-mile beneficiaries (in this context, the nano entrepreneur).
- A clear articulation of the Theory of Change along with a set of neatly defined impact metrics that stakeholders hope to achieve for all parties involved as part of the BF contract will help align expectations. Accurate data collection at regular intervals will help validate the Theory of Change. However, data should be collected not just for the borrower level impact but also for the FSP-level impact. This will help analyse if indeed deploying BF instruments reduces risk perceptions (in the medium to long term) and how leveraging these instruments can change financial portfolio of the FSP in terms of customer profile, cost of operations and credit risk, etc.
- Given the flexible nature of BF instruments, there is considerable scope for tweaking the shape and structure of these models with the deliberate objective of achieving enhanced access to suitable credit for nano entrepreneurs. How the benefits of blended finance are absorbed by various stakeholders, such as investors, lenders, and end borrowers, largely depends on the manner in which these structures are deployed. Impact capital can be structured with specific clauses along with in-built incentives for FSPs to ensure a win-win strategy for both lenders and borrowers. These specific clauses could be in the form of accurate and transparent impact metrics, the nature of clientele segment served/reached, etc. For example, one could think beyond standalone guarantee models since credit guarantees, while being the most implemented instrument, are also often insufficient. To be effective, they could be bundled with technical assistance and grants to help lenders build capacity and actually reach the intended last-mile segments.
- Philanthropic foundations and other enabling institutions can invest resources in creating standardized templates for BF models to facilitate replication. This will make the process of executing BF contracts less onerous. These templates can also include manuals or built-in guidelines that describe the regulatory and legal requirements from a compliance perspective. This is important because executing a BF contract is complex with different types of institutions having to follow a unique set of regulatory norms. Greater visibility over regulatory procedures in complex BF contracts can reduce transaction cost of executing these contracts.
Footnotes:
[1] This article has been written after conducting extensive stakeholder interviews with several practitioners who have experience in deploying BF instruments in India. These conversations revealed specific areas of successes, challenges, and learnings across each type of BF instrument. We gratefully acknowledge the insights and contributions of sector experts from Dvara E-Registry, Vest-in Villages, Dell Foundation, India Impact Investors Council, Kaleidofin, KiVi, IFMR LEAD, British Asian Trust, IPE Global, Dvara Holdings, Dvara KGFS, Vivriti Asset Management, Finreach, Caspian Debt and Dvara E-Dairy.
[2] Estimated from database of India Blended Finance collaborative
[3] Credit is considered suitable when it is accessible, affordable, and relevant to the context and needs of its target segment
[4] Enterprises that do not employ any hired worker on a fairly regular basis
[5] Data from Annual Survey of Unincorporated Sector Enterprises (ASUSE) of 2023-2024
[6] Buteau, S., Gupta, A., & Hariharan, V. (2023). Impact of Access to Finance on Nano Enterprises. LEAD at Krea University. https://ifmrlead.org/impact-of-access-to-finance-on-nano-enterprises/
[7] Blended finance. (n.d.). Convergence. https://www.convergence.finance/blended-finance
[8] OECD. (2018). Making blended finance work for the sustainable development goals. OECD. https://doi.org/10.1787/9789264288768-en
[9] Credit loss guarantees help reduce risks for lenders by covering potential loan defaults, enabling access to capital for underserved borrowers. This strategy attracts more commercial investment, lowers cost of capital and enhances financial inclusion for New to Credit (NTC) segments.
[10] Concessional financing involves blending below-market rate debt from public or philanthropic sources with market-rate commercial investments, reducing capital costs and enabling riskier investments
[11] Grants and Technical Assistance are usually deployed supporting early-stage activities like research, capacity building, and pilot projects, reducing uncertainty and operational costs.
[12] Results-based financing provides funding based on achieving pre-agreed, verified outcomes, shifting risk from public to private investors and fostering innovation. Key instruments like Development Impact Bonds (DIBs) and Social Success Notes (SSNs) incentivise measurable impact, offering structured payouts to stakeholders based on achieving clearly defined outcomes.
[13] In traditional finance, structured finance pools assets like loans and bonds into tranches to manage risk and return. In blended finance, this model attracts both commercial and catalytic capital, with impact investors taking junior tranches to enhance credit ratings and expand access to finance. This approach helps recycle capital and supports sectors like microfinance and NBFCs.
[14] Dua, A., Chauhan, S., Menon, M., Gupta, S. S., Pai, R., & Pinge, D. (2023). The Blended Finance India Narrative (p. 42). Asha Trust and India Impact Investors Council. https://ashaventures.in/wp-content/uploads/2023/05/The-India-Blended-Finance-Narrative-Report-1.pdf
[15] Skilling and Supporting Women Entrepreneurs in Rural Tamil Nadu. (2025). World Bank. https://www.worldbank.org/en/news/feature/2025/02/07/skilling-and-supporting-women-entrepreneurs-in-rural-tamil-nadu
[16] Sebi amends AIF rules; investors to have pro-rata rights in investments, proceeds distribution. (2024, November 21). Outlook Business. https://www.outlookbusiness.com/markets/sebi-amends-aif-rules-investors-to-have-pro-rata-rights-in-investments-proceeds-distribution
[17] SEBI allows entities such as those owned or controlled by Governments, multilateral or bilateral development financial institutions, State Industrial Development Corporations to subscribe to junior classes of units of AIFs. However, many of the philanthropic investors and other foundations are not allowed to take junior positions
