Why and How to Evaluate the Creditworthiness of SMEs' Business

In banking, assessing the credit risk of small and medium size companies (SMEs) is one of the most challenging tasks. The difficulties stem from fragmented financial data, length of the process, strength of risk models and issues such as the tension between credit and sales. The competitive lending environment, regulatory requirements, different geographies, and positions in the economic and credit cycles also have an impact. Let's see how the challenges might be addressed.

SME Market:

Global:

• MSME market :365-445 million 
• Lack of access to credit : 70% (appx)
• Current credit gap for formal SMEs is estimated to be US$1.2 trillion
• Total credit gap for both formal and informal SMEs is as high as US$2.6 trillion

India:

• Expected to emerge as one of the leading economies in the world and likely to become a $5 trillion economy by 2025 
• Increase in growth of manufacturing sector by 12-14% per annum and share of GDP to 25%
• 51 million SMEs in India touted to be a $25.8 billion market for emerging technologies by 2020 
• Only 10 million SMEs are technology ready

Assessing the credit worthiness of SMEs:

Process:

1. Get access to their bank transaction history via a direct access to their bank transactions with their consent
2. Analyzing the transactions available on a periodic e-statement PDF generated by the bank
3. Analyzing a scanned copy of a printed statement

Problems:

1. Applicants currently either do not have access to net-banking or are unwilling to share an e-statement
2. Security concern for applicants while giving their bank transaction records
3. Bank e-statements can be manipulated by the applicants

Need:

1. More e-statements to improve the automation
2. Improve conversion for faster turn around time
3. Identify manipulation before analysis to avoid funding to someone committing a fraud

Credit Score:

Financial institutions and NBFCs tend to check the credit score before disbursing any loans. Traditionally banks - credit history for calculating credit score and assessing the risk. 70-80% of the SMEs don’t have access to internet and checking the collateral needs manual effort. Third party credit analysis tools - CIBIL Transunion, Equifax, Experian, CRIF. NBFCs are changing the way loans are availed by SMEs. NBFC check on certain factors to get alternate data to check the credit worthiness of SMEs. New Technology models have come up to analyze the data – Data Modelling, Data Analysis, Artificial Intelligence, Predictive Algorithms, Machine learning, Neural Networks.

Credit Scoring Process:

Solution:

Lending data from Consumer bureaus and Costumer Mobile

Integration with third party analytics systems - FICO (Fair Issac Corporation), CIBIL Transunion,CRIF Mark etc. Integration with Government systems such as ITR for income tax details and UIDAI for Aadhar card information to check the KYC documents in real time

Indians are the second-largest mobile phone users (over 600 million unique users) in the world. Activities performed by the user

• Phone calls
• Text messages
• Browse internet
• Social Media
• Recharge
• Apps& Online shopping

Data from mobile phone records, pre-paid top-ups, mobile bill payments, app download history can be used to build a bank statement and can be used to assess consumer risk and determine credit worthiness

Tie-up with Telecom vendors Reliance, TATA, Airtel for user mobile history data

1.Mobile data - Tie up with Telecom vendors:

2.Psychometric tests to analyze the personality:

• Prime Minister of India has launched certain programmes for betterment of financial inclusion - Make in India – Praja Dhan Yojana
• Google to bring 20 million SMEs online by 2017
• In case online transaction history is not available, NBFCs can use other scoring models to analyze the personality – demographic, social, psychological etc
• Predictive algorithms to predict the probability that the customer might default and hence reduce the risk
• Psychometric tests can be used to judge a person’s reputation, character and credibility across sectors, especially in hiring, marketing, or sales functions
• Voice verification and voice analysis

3.Third Party Integrations:

Approach:

Automation: Key to process improvement

• Event based triggers with an events library, based on internal and external assessments
• Automated data extraction using optical character recognition (OCR) from images, electronic feeds or paper documents that supports various formats
• Automated financial spreading with industry specific normalization to the organization’s required standards
• Automated suggestion of credit limit for each case by breaking down organization-wide risk exposure limits to deal level and combining with credit scores
• Automated generation of loan agreements, contracts, terms and conditions in pre-defined templates
• Automate workflows – queue management, case tracking, notifications and status alerts

SME risk assessment is a multi-faceted process with many challenges. Key to success in addressing these challenges are processes that enhance the analysis of quantitative and qualitative data, the quality of decision making, and the relationships between borrowers and lenders.