How New-Age Credit Analysis is a Boon for the MSME Sector
October 3, 2018
4 minutes to read
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Credit is the lifeline of MSMEs as it helps them cope with unexpected market conditions, late payments in their forward supply chain, secure working capital for day-to-day operations and cope with other financial dynamics that ensure the survival of their business. But sadly, credit is a luxury that only a handful of Indian MSMEs receive due to common practice and over-oversight by conventional lending entities.
According to the India Economic Study which was tabled by the Union Minister of Finance in Parliament this year, India’s MSME sector faces a major hurdle to qualify for credit and received only 17, 4% of the total outstanding loan. However, the new credit analysis procedures are helping to change the status quo. Let’s find out how:
Better Perspectives: How Are New Age Credit Analysis Procedures Game-Changing for MSMEs?
For a long time, conventional financial institutions in India, such as banks and NBFCs, have used outdated credit analysis methodology. This methodology is loosely related to the industry in which an MSME operates, the assets it owns, its finances, the trading circle, its existing liabilities, the gross NPAs from the region, the prevailing market conditions, etc. Despite close scrutiny with such detailed details, India’s MSME sector is currently looking at stressed assets (NPAs) to the tune of Rs. 80,000 crore.
But why are NPAs so ubiquitous in the industry? A closer look at the sector informs us that MSMEs are not on a par with large companies, as the latter mainly benefit from economies of scale and excess cash flow. MSMEs, on the other hand, operate on lean finances and need to extend debt on invoices to their downstream supply chain. This is a general industry practice aimed at retaining existing customers. These debts are repaid anywhere about 30 to 90 days from their original date and can sometimes take up to 6 months to a year for settlement. However, the same MSMEs need capital to run their day-to-day business operations, manage inventory, purchase equipment, pay maturing debts, etc. The majority of these requirements cannot be met without credit, and since most of them are time-based, they require urgency in terms of achieving credit.
Now, given the scrutiny that mainstream financial institutions undertake, it typically takes weeks and sometimes months to disburse loans to a cash-strapped MSME unit. This delay in disbursing credit often comes at the cost of several days’ loss of business productivity, which further contributes to the tangible losses suffered by MSMEs. The credit received simply plays the role of keeping the engine running for the next few days or months and ultimately results in an APN.
New Age Credit Analysis:
This is precisely where new age credit analysis makes the difference for Indian MSME units. By leveraging the increasing digitization, digital transactions and activation of Aadhaar, technology-driven lending platforms in India have dramatically reduced the processing time for MSME loan applications to less than 1 to 2 days, compared to weeks and months in the previous regime. They also require minimal documentation and provide a majority of relevant data via primary data repositories such as the company’s business database (vis-à-vis figures around a balance sheet, shareholder models and property, etc.), or via ancillary sources. In addition, they widely use advanced technologies such as artificial intelligence and big data for credit profiling, which makes their lending decision more effective and efficient. This approach also eliminates human interference at the majority of touchpoints, reduces the overall time required to process the loan application, and maintains unconscious assessment of human errors and omissions.
As one of its greatest merits, this in-depth but rapid data analysis prevents high-potential and creditworthy MSMEs from being ostracized due to their field of activity 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 improving credit penetration in the sector – thereby improving the business landscape and promoting growth of both the sector and the nation. .
The credit deficit within the MSME sector, at present, is estimated at around Rs. 2.93 trillion. As the technology-driven lending platform continues to serve as a financial catalyst for the cash-strapped industry with swift credit services, it can be said that this void won’t take long to fill.