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


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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.  

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Pranay Bhargava
CEO & Founder
[email protected]
+91 9848748364

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


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