How Can Cashflow Based Digital Lending End The Credit Drought In India’s MSME Space?

-by Shachindra Nath, Vice Chairman & Managing Director, U GRO Capital

MSMEs in India have traditionally been a credit-starved business segment. MSMEs employ over 110 million people and account for nearly 30 percent of the country's GDP. However, late payments and related disputes suffocate their cash flow. We firmly believe that a lack of timely credit prevents MSMEs from realizing their full potential, and that traditional lending parameters based on collateral and security are ineffective in a dynamic MSME space where funds are required quickly.

The digital revolution in finance has now opened up more avenues to meet their demand for funds. An optimal equation of digitisation & digitalisation has paved the way for innovative lending models. Cashflow based lending is one of the models that promises to help the MSMEs obtain much-needed credit.

With the advent of GST (Goods & Services Tax), smaller entities are finding it advantageous to report the top line resulting in robust compliance. The GST records can then be combined with other financial parameters such as bank statements, etc., to judge an entity’s repayment capabilities. Lenders can ascertain the enterprise’s profitability by examining its business dynamics. It would enable them to ascertain the business’ cashflows & as a natural extension, its profitability. Again, when blended with CIBIL (Bureau) reports, it gives a data-backed objective picture of the business. Lenders can then deploy machine learning algorithms which can help compile information from all three sources (GST, banking & bureau) to allow them to evaluate the creditworthiness in minutes, leading to better, faster, & more accurate credit decision-making.

An MSME’s cashflows are volatile in nature & hence traditional methods were found to be deficient in assessing them accurately. With GST & banking-based models evolving, powerful machine learning tools now available, and the Central Government’s planned interventions with introduction of OCEN and the Account Aggregators initiative, the future of cash flow-based lending model is bright. It augurs well for India’s MSME segment, which will get access to easy & convenient credit. It will enable them to drive India’s wheels of progress.

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