India is the largest impact investment market in South Asia with the sector attracting approximately $11 billion equity investment between 2010 and 2019 (IIC -Asha Impact, 2020). However, the industry has been starved of debt finance.

An IIC-Bridgespan research initiative reveals that debt and blended instruments account for only 30% of the funding infused into ‘social enterprises’. Further, the financial services sector enterprises received over two-thirds of the debt funding with the remaining one-third going to all the impact sectors combined. Contrary to this trend, globally, predominant instrument for funding used by impact investors is private debt.

Our discussions with 20 leading international and domestic DFIs, commercial banks, Venture funds disclose that a lack of risk appetite amongst lenders, dearth of innovative blended financing instruments, inadequate credit guarantee structures, stringent regulations around external commercial borrowings and exorbitant hedging costs, have contributed to this striking shortfall in availability of debt finance for social impact enterprises. While venture debt funds are now sprouting in India this is only a very recent trend.

A financial analysis of ~500 non-FS impact enterprises reveals that atleast 50% of enterprises are highly credit worthy and have appetite to take on debt. These enterprises perform well on all key financial metrics like revenue size, growth, positive EBIT, cash runways and other financial health parameters.