‘Digital India’ is much more than a political slogan. At its core, it is the belief that technology can help improve access to services for hitherto neglected segments of society and the economy.
One such segment is SMEs. Technology is already revolutionizing lending in India and it can bring a true disruption in SME lending, which is ripe for improvements. Measuring borrower risk accurately is something that lenders have always struggled with. This gets trickier with smaller businesses given that such these borrowers do not always have organised revenues and expense trails.
There is also an economic argument to preferring larger exposures. Traditional lenders regarded SMEs as costly exposures considering fixed costs of loan origination and administration. Lenders need to make multiple visits to locations that are often times remote, appoint appraisers, besides deploy other resources for loans that could be as small as Rs 10-15 lakhs. Building a book from such loans can thus be fairly expensive.
In the post-2008 Financial Crisis era, as problem exposures grew and credit growth waned, banks became even more risk averse towards new and smaller exposures, preferring instead to deal with large corporates with steady track records. This seemed a logical and cost effective way of building the loan book. However, strain in large corporate loans has increased multi-fold in this post-crisis era – industrial sector gross NPA ratio, which used to be close to 2.5% in 2012, had grown to 11.9% by March 2016.
Building a larger SME loan book can offer banks a way to diversify risks by moving away from the large corporate concentration. One key to doing this cost effectively is technology, which can help with:
a) Apps, websites, and databases can reduce the cost of acquiring clients. Companies should maintain a clear cut e-documentation for all its clients, which reduces the need for physical visits by bank officials – this is particularly useful for customers located in remote places. Our systems can even read the documents directly from emails.
b) Verifications: We verify the authenticity of the documents submitted by the borrower within minutes using APIs, a task that previously took days as it involved physically visiting many offices. Moreover, standard requirements like bank statements and ITRs are accessed by us directly from the source in electronic form. This reduces time and cost of processing.
c) Companies should develop proprietary algorithms to connect borrowers with the lenders that are appropriate for their needs, which improves success rates and reduces origination time. These algorithms help customers assess eligibility within an hour of application submission. For example, we helped a practicing doctor fund his venture managing lab machines for clinics that was facing a hard time due to the specialised nature of the business.
The traditional data points used for credit appraisal – such as bureau scores, ITRs and bank transactions are still valid and will remain so. What has changed in recent times, especially post-demonetisation, is that the digital footprint of people and businesses is getting wider and deeper. Today, some lenders have a shorter checklist of requirements precisely because they can obtain comfort on the borrower’s credibility and financial standing from this digital footprint that either didn’t exist or they couldn’t access earlier.
Companies such as our should aid lenders harness these data points in a cost efficient manner, reducing the cost of credit appraisal, in effect reducing the cost of borrowing for our customers.
In this manner, technology not only helps to process loans without compromising on origination or credit appraisal standards but in fact makes the whole process easier and cheaper to execute.
The article was authored by Shailesh Jacob for CXOToday on February 2, 2017.