How New-age Credit Analysis Procedures are Backing MSME Loan Applications Better?
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Credit is the lifeline of MSMEs since it helps them cope with unexpected market conditions, delays in payments by their forward supply chain, secure working capital for day-to-day operations, and face other financial dynamics that ensures their business survival. But sadly, credit is a luxury that only a handful of Indian MSMEs receive owing to prevalent red-tapism and excessive scrutiny by the conventional lending entities.
As per the Economic Survey of India that was tabled by the Union Finance Minister in the Parliament this year, Indian MSME sector faces a major hurdle in availing credit and received only 17.4% of the total credit outstanding. However, new-age credit analysis procedures are helping change the status quo. Let us find out how:
Better Prospects: How new-age credit analysis procedures are changing the game for MSMEs?
For long, conventional financial institutions in India such as banks and NBFCs have used outdated credit analysis methodology. This methodology is loosely tied around the industry an MSME operates within, the assets it holds, its financials, the commercial circle, its existing liabilities, gross NPAs originating from the region, prevailing market conditions, and so on. Despite a scrutiny with such extensive detailing, the Indian MSME sector at present stares at stressed assets (NPAs) to the tune of Rs. 80,000 crore.
But why are NPAs so ubiquitous within the sector? A deeper look into the sector informs us that MSMEs are not on a level playing field with large enterprises, as the latter is essentially benefitted by the economies of scale and cash surplus. MSMEs, on the other hand, operate on lean finances and have to extend debt on invoices to their forward supply chain. This is a general industry practice aimed at retaining existing customers. These debts are repaid anywhere around 30 to 90 days from their date of originations and sometimes can take as much as 6 months to a year for settlement. However, the very same MSMEs require capital to ensure their day-to-day business operations, manage inventory, procure equipment, pay for maturing liabilities, and so on. A majority of these requirements cannot be met without credit and, as a bulk of them are time-based, they demand urgency in terms of credit fulfilment.
Now, given the scrutiny that conventional financial institutions undertake, it generally takes them weeks and at times months to disburse credit to a cash-starved MSME unit. This delay in credit disbursement often comes at the price of losing multiple days of business productivity, which further contributes to the tangible losses experienced by the MSME. The received credit merely plays the role of keeping the engine running for the following few days or months and, ultimately, translates into an NPA.
The New Age Credit Analysis :
This is precisely where new-age credit analysis is making a difference for Indian MSME units. Banking on the growing digitization, digital transactions, and Aadhaar enablement, the technology-driven lending platforms in India have substantially reduced the turnaround time on MSME loan applications to as less as 1-2 days, down from weeks and months in the previous regime. They also require minimal documentation and source a majority of pertinent data via primary data repositories such as corporate affairs database (vis-à-vis figures around a balance sheet, shareholding and ownership patterns, etc.), or through ancillary sources. They, moreover, extensively use cutting-edge technologies such as Artificial Intelligence and Big Data for credit profiling, making their loan decision more efficient and effective. This approach also eliminates human interference across a majority of touchpoints, decreases the overall time required to process the loan application, and keeps the assessment oblivious to human-related errors and omissions.
As one of its biggest merits, this in-depth yet time-efficient data analysis prevents high-potential and creditworthy MSMEs from being ostracised because of their area of operation or the broader market conditions that are not applicable to them. This approach improves credit efficiency, prevents NPAs, reduces the cost of credit, while simultaneously enhancing the credit penetration within the sector – thereby improving the business landscape and promoting the growth of both, the sector as well as the nation.
The credit gap within the MSME sector, at present, is pegged at around Rs. 2.93 trillion. As tech-driven lending platform continue to serve as a financial enabler to the cash-starved sector with prompt credit services, it can be said that this void is not going to take a very long time to fill.