Vision For An Efficient SME Lending Framework: A Digital, Risk Based & Sustainable Approach.

Severely impacted by lockdowns, the growth of MSME’s is critical for getting the economy back on track. Keeping this in mind, the government has recently announced a 3-lakh crore credit guarantee package for MSME’s.

However, to make this possible, India's SME credit delivery system needs to address the dual issues of underwriting decision-making framework and operating model to keep it agile. Effective handling of the challenge to SME lending requires lender to transform their operating model by improving their risk decision-making framework, which is digital, risk based and considers qualitative and qualitative aspects about the borrowers.

The approaches mentioned below consider both short- and long-term SME lending problem statements:

Next Generation MSME lending ecosystem

In this article we propose a risk-based framework to address the complex MSME lending processes which involves multiple governing bodies, banks and numerous MSME’s.

Our approach lists the following key principles to create a sustainable ecosystem:

  1. Maximise digital processes to increase credit outreach.

  2. Know the essence of MSME’s – industry, financials, promotors, history, tax filing etc.

  3. Fair Risk based framework, giving transparent picture to governing bodies and participating banks.

  4. Equip participating banks with background information along with credit model-based risk assessment along with recommendations.

  5. Connected ecosystem to check authenticity of applications, GST Returns, Income Tax Filings, Financials and credibility of people involved.

  6. Communication hub to keep all involved parties updated on movement and status of the application.

  7. Analytics layer on the top of huge datasets to analyse, track and monitor the overall program to ensure success and conduct performance analysis.

  8. Establish risk-based culture to ensure deserving MSME’s get access to credit during a crisis.

Need for streamlining MSME lending framework

MSMEs play a critical role in driving financial growth and transforming the Indian economy. Large number of organised and unorganised MSMEs are fundamentally driving this growth.

Streamlined and digital frameworks which involve relevant bodies tied up in central manner will play a key role in making MSME lending a success. Nature of the MSME along with its credentials is very critical to decide approval to finance. A typical assessment, one size fits all, approach will not be logical considering the breadth of the sectors, risks involved, and the multiple parties involved in execution.

Risk based approach is the best approach to fortify assessment of the MSMEs to carry out the following tasks:

  1. Transparent and risk-based approach for fair assessment of creditworthiness of a business/MSME or people involved.

  2. Automation and cross checking against rules set by government such as different ratios across different sectors. This will decide the eligibility of MSMEs to be processed for lending.

  3. A clear check mark which will come out of the risk-based credit models to ensure authenticity, information completeness along with recommendation for the loan(s).

  4. Data exchange, analytics which is crucial for participating banks and government bodies.

  5. Complete loopback of information where all the parties are notified time to time to build transparency.

Processing a New MSME Customer Registration on portal: Loan Application Below is proposed approach towards managing MSME new loan applications:

New MSME Customer Registration On Portal - Loan Application

  • For ease of access, MSMEs have to create an account on the web portal designated towards loan application and processing. Relevant authentication measures will be taken care of.

  • Post registration, authentication process will be conducted for the MSME firm along with key promotors therein. Same will be done with Firm PAN, Promoter Adhaar or PAN CARD along with authentication via government standard APIs.

  • Then online application will be collected. In case of established MSMEs where compliance is in place, relevant information on financials, GST, Income Tax etc, will be uploaded by the authorised user along with other details of the application.

  • In case the MSME is new and does not have enough GST, Income tax history, they can upload the business plan along with promotor PAN Numbers and Adhaar Numbers to fetch the credit scores & supporting info for the promotors.

  • A cross check of the documents, financials, GST details is initiated, and proposal is passed to next evaluation.

  • Above details, Data from Credit Bureau along with credit history information is then fetched from auto services digitally.

  • With all this information, government criteria such as different sector specific ratios are cross checked and MSME’s fulfilling the set rules will be put forward to the risk-based credit assessment stage. Transaction evaluation is also performed as needed.

  • Application with supporting data is then passed to risk-based credit scorecards towards predicting creditworthiness of MSME. Post this pass, recommendation is derived. If needed, risk-based pricing element also can be introduced along with the rating recommendation. The delta over base rate as a recommendation can be derived from the same.

  • If the recommendation to loan is negative, then the MSME will be directed to visit relevant bank as per the region and location of the borrower and respective bank servicing the region.

  • If rating outcome is positive, then result and recommendation (along with possible delta on base rate) is passed on to next step to the respective bank along with documentation in digital form.

  • All this information is posted to the data Hub for future reference.

  • Bank can do their own analysis using information along with risk-based rating provided and can initiate the disbursement process. Information of the disbursement will be posted on this MSME portal for final 360-degree loop back on the application.

  • Based on the government rules and reporting frequency, the repayment data can be posted to this portal time to time. This data will be posted back to data hub against the relevant MSME with metadata such as sector, geography, size etc. Recovery and other credit modelling will be done to utilize this data and store meaningful credit info on the data hub.

  • Communication Hub – Plug-in based communication hub will act as a bridge to take care of alerts and notifications at all levels across all relevant parties.

  • Analytics Hub – In addition to the data hub, the analytics hub will take care of various dashboards and AI/ML based trends/projections as mentioned below:

  1. Sector wise disbursements

  2. Distribution of loans across various parameters such as states, districts, zones, banks etc

  3. Performance analysis of governing bodies, officers, banks and ranking.

  4. Disbursement vs repayment trends and projections.

  5. Risk analytics to model various risks against disbursed loans

Managing lending for existing MSMEs within the ecosystem

Below is proposed approach to manage MSMEs that exist in the ecosystem

Existing MSME Customer Portal - Loan Application

  • In case of existing MSME, the online application details are already stored on the portal by way of prerequisite digital form/applications. So, in such scenario eligibility criteria via checking parameters plays a very important role in decision making. As the compliances are put in place, relevant information on financials, GST, Income Tax etc, are uploaded by authorised users along with other parameters which can be used to assess eligibility.

  • If the customer does not have an existing debt, then, online credit assessment facilities have to check criteria such as different sector specific leverage ratios and only then further pass recommendations for the MSME’s to avail loans are facilitated by processing banks.

  • If the customer has already availed of the loan facility. Then, lenders have to compulsorily consider following ratios to decide on refinancing.

  1. Total Outside Liabilities / Adjusted tangible Net Worth

  2. Total Debt / EBITDA

  3. Current Ratio

  4. Debt service Coverage Ratio

  5. Average Debt Service Coverage Ratio

  • Amount of loan can be decided through credit model parameters information about the MSME and then passing the coverage test for further processing.

  • If MSME fails to pass coverage test, then the MSME will be directed to visit relevant bank as per the region and location of the borrower and respective bank servicing that region.

  • Lending institutions are free to consider other financial parameters for decision making in upsizing of loan. All the information will be available in digital form for these participating banks via this proposed platform.

  • If MSME fulfils criteria of upsizing of loan, then LTV ratio and other model parameters take final decision in sanction recommendation process.

  • Credit monitoring and review of loan financials on quarterly basis. This eventually builds into trends and data sets for the future and also for overall reporting.

  • If the recommendation for the loan is negative then the MSME will be directed to visit relevant bank as per the region and location of the borrower and respective bank servicing the region.

  • If credit rating outcome is positive then result and recommendation (along with possible delta on base rate as recommendation) is passed on to next step to the respective bank along with documentation in digital form. Concept of risk based pricing can be applied to suggest this delta on the top of base rate to ensure profitability of lender along with making credit available to maximum MSMEs.