When COVID-19 lockdowns disrupted two-thirds of the Indian economy, much of the burden from the crisis was borne by the poor, who are often self-employed outside of the formal market (constituting 75 percent of rural households and 50 percent of urban ones). In times of crises, the demand for working capital is high. But with minimal savings and no insurance, vulnerable communities typically have no access to non-predatory credit. Lacking a formal credit history, the capital they may need to protect their lives and recover their livelihoods is almost impossible to obtain from formal lending institutions, which leads to a vicious cycle: As they are not trusted by formal lending institutions, they will continue to be kept out of formal credit. (The pandemic has also adversely impacted micro-finance institutions, which have been a common source of funds for such vulnerable communities as their liquidity and repayments cycle have been thrown off course.)

Blended finance is a tool that can be deployed to mitigate these problems. Based on the principle of leveraging philanthropic or concessional capital to mitigate investment risks and rebalance the risk-reward profiles of pioneering, high-impact investments, concessionary capital can mobilize additional commercial capital, and create a multiplier effect in the impact it achieves. This becomes particularly important during a crisis, when stretching beyond the boundaries of traditional financing can accelerate recovery measures.

A recent example of a successful blended finance platform is the REVIVE Alliance in India, led by Samhita-CGF in collaboration with a number of funders including UNDP. Launched in 2020, this $15 million multi-stakeholder platform was created to support “high-risk” communities, such as informal sector workers and micro-entrepreneurs facing severe liquidity crunch due to the pandemic. The platform enables financial inclusion by supporting individuals and businesses from the informal economy to access timely and affordable credit, with the goal of eventually integrating them into the formal market. While the loans are meant to solve short-term working capital needs, they also enable long-term financial inclusion by creating a digital footprint for the beneficiaries, breaking them out of any vicious credit cycles.

Read the full article about blended finance by Riya Saxena and Raveena Joseph at Stanford Social Innovation Review.