How has Technology Redefined MSME Lending?

Differentiated underwriting, customized offering, flexibility, and fewer criteria for MSME loan eligibility are but a few reasons that make NBFCs a better choice for small organizations. Findings revealed that NBFCs demonstrated the lowest turnaround time for MSME loans which fell from 24 days in 2014 to 18 in 2018. (Stats from Economic Times)

As the most dynamic and promising sector today, MSMEs need easy, quick access to credit. With over 60 million MSMEs in India and a lending potential of 100bn that banks are unable to meet, they are forced to turn to informal sources of credit to finance their needs. There’s a wide gap between the demand and supply of credit in the MSME sector and NBFCs are well on their way to bridging it.

Technology and its uses have seeped into every industry across the board, each to different extents. The NBFC sector is no exception. Whether it’s the digitalization of documentation for paper-free processes or harvesting intelligence to deliver an exceptional, seamless experiences. The time has come for the leaders of change to adopt and implement technology to improve efficiency, accuracy, and speed and deliver value to their customers.

Against all odds, public deposits in NBFCs increased from $293.78 Mn in FY09 to $4.95 Bn (INR 319.05 Bn) in FY18.(sourced from Inc42, link mentioned) And, it might just have been the new financial technologies being leveraged that are responsible for this growth. Many NBFCs are strategically targeting this underserved market and leveraging technology to meet their needs. Let’s find out how tech is changing the MSME lending landscape:

Risk assessment

In the past, NBFCs depended on collateral and physical documentation to assess the creditworthiness of a small business. The birth of the internet and the domination of technology today has facilitated access to a wide range of formal and informal sources of data. It draws a clearer picture of the small business’ financial standing and allows financial institutions to assess their eligibility and take a call on whether the application should be approved or denied. This gives small businesses, with little to no formal proof of profit, the chance to become credible borrowers.

Documentation has gone digital, and processes online. While the migration of data to the cloud helps improve accuracy and speed of response, it inadvertently opens the organization up to a number of cyber threats. NBFCs must take the security measures necessary to safeguard their customer data, while they optimize the use of tech to simplify risk assessments and other operations.

Loan application process

Gone are the days when MSMEs needed to fill out a multi-page loan application or be present at a fixed location. Financial services technology has simplified the process to the extent of a few clicks. Additionally, it has the capacity to identify potential shortcomings related to the repayment of the debt and takes a call on whether to approve or deny the loan, almost instantly. The repayment process has also been simplified through the usage of UPI payment gateways that lets you pay both the principal and interest online.

Earlier the options available to MSMEs were limited by location, collateral, time, interest, etc. Technology gives customers access to lenders that were once out of their geographical reach and vice versa. NBFCs can now reach rural markets and provide services to the financially weaker and unserved markets like never before.

Challenges Faced

Technology is no longer the way of the future, but the way forward today. NBFCs that fail to recognize this critical shift, run the risk of extinction. Transformation is not possible overnight, it takes years of planning, implementation and course correction. There are a number of challenges faced by NBFC on the journey towards a digital tomorrow, some of which include:

Capital Intensity- Digitalization is a capital-intensive investment that a number of NBFC are unable to afford or unwilling to create a budget for. Many of them fail to see the potential impact and fear that it might be a risk too big to take.
Time and Man-power- Transformation is a time and effort consuming process that some NBFCs are unable to accommodate.
Stability- The NBFC market is currently in a state of influx, where most players are at a loss about what to do next.
The changes mentioned above have simplified processes, boosted the flow of credit and enhanced the overall loan experience for the MSME sector. It has also allowed financial institutions to launch MSME schemes that are customized to meet their needs. As one such NBFC, Capri Global is dedicated to empowering them with the finances to sustain and grow their businesses.

The contribution of the MSME sector to the GDP of India and the lending they receive from NBFCs, are both undeniable. Technology has become the stepping stone into the future and NBFCs that want to not just survive but win down the line have no choice other than walking the tech tight rope.

The Quickest Way to Build Credit Scores with Tradelines

There exist many ways to build and improve your credit score, but most of them take time and patience to come into effect. However, there is a quicker and easier way to this – making use of another person’s tradelines to build or better your credit score. You can do this by two means.

Becoming an authorized user

Often, you have a friend, a family member, or a significant other who has a long history of positive credit scores and paying bills on time. By being added as an authorized user to such a person’s credit card, their tradeline gets shared with yours and impacts your credit score in a positive manner. You don’t need to possess or use this person’s credit card to reap the rewards of being an authorized user. All you need to do is ensure that the primary cardholder, i.e. your friend or family member, reports the activity of all authorized users to the credit bureaus. Else, it can be a waste of time as non-reporting won’t help with credit building at all. It is advisable to come to an agreement with the primary cardholder before the exercise, especially if the person expects you to pay your share to him/her for giving you such access to their credit history.

Buying third-party tradelines

Not all people are fortunate enough to have friends or family with positive credit history, and even if you do, these members may not be willing to give you authorized access for a variety of reasons. In such a situation, the quickest way to build credit scores is by buying tradelines from a reputed and legitimate company. The tradeline purchase is made by a third-party agency or company who specializes in the same.

Professional companies buy tradelines from people who have a long history of positive credit card or loan payments and offer them to you at a fee. The advantage of this method is that you can choose one or more tradelines that help offset the not-so-great information on your credit report. You can also make a choice based on your goals – whether it is to obtain a higher limit on your existing credit or to secure a large sum of loan for a new house or car. The effect is typically visible in anywhere between 45 to 90 days.

However, when opting for this method, be wary of the company that you choose to work with. There is an exchange of sensitive information, including identity proofs with the third party and tradelines sales company. So, be absolutely sure that you avail the services of a legitimate organization lest your identity gets stolen or misused.

Also, remember that buying tradelines as the quickest way to build credit only works for a short term. You are usually removed as the authorized user once your goal has been achieved. Post obtaining a new credit card or loan, you need to continue making payments on a timely basis lest your credit score topples again, sending those hundreds or thousands of dollars you spent buying third-party tradelines down the drain in no time.

How to Get an Auto Loan When No One is ready to co-sign for you?

Auto loan approval speeds up when you have a co-signer. You might have suffered from bad credit and the best solution would be to get a cosigner on board. Ideally, a co-signer is someone who agrees to repay the auto loan amount in case the borrower fails to make regular payments. Co-signing is a generous act of helping a family member or a friend in need. But more often than not, the risks involved with co-signing an auto loan are massive. Due to the numerous financial risks, you may be left in a situation with no co-signer.

What are the Risks of Co-Signing an Auto Loan?

1. Directly Liable to Make Payments

In the worst-case scenario, if you are unable to make payments, the co-signer will become directly liable to pay them. The lender has the right to sue the co-signer, who has agreed to repay the loan in the past. Although the co-signer has not taken an auto loan, he has helped the borrower attain auto loan approval. Therefore, he can be held responsible for making payments in case the borrower avoids making them.

2. Debt to Income Ratio Disruption

When a co-signer comes on board, his total debt increases as compared to the gross monthly income. The person co-signing for you would always think about his/her future financial requirements. If he co-signs for an auto loan, he might be denied for a loan in the future because there is already a lot of debt under his name. When someone co-signs for you, it can disrupt their future financial planning. And so, they avoid co-signing for a loan.

3. Co-signing Makes Relationships Bleak

A co-signer will be ready to risk their credit score only if they are a close friend or a family member. In most cases, when you miss out on payments, it becomes your co-signer’s duty to bring you into the lawsuit. Most likely, your friend or relative may even have to sue you and that can strain your friendships or family ties.

If Co-Signing is a Bad Idea, then how do you obtain an Auto Loan?

If you are unable to find a co-signer, do not worry. There is hope. Get back to the drawing board and change your game plan. Focus on the following things for easy approval:

1. Increase the Amount of Down Payment

When you apply for an auto loan, make sure you are making a big down payment that reduces the amount of the car loan. Ideally, 20% or more of a down payment is a good amount to pay upfront for auto loans without a co-signer.

2. Work on Building Stellar Credit

You require a co-signer in the first place because of a bad credit history. Work on increasing your credit score by paying off past debt, clearing credit card balances and paying your auto loan on time.

3. Apply for No Co-Signer Auto Loans

Last but not least, consider applying for no co-signer auto loans. There are many online auto financing companies that offer auto loan approval without the need to co-sign. Interest rates may be a tad higher but they will compensate for the time and effort take to convince someone to help you out. You can always negotiate interest rates with the lender and seek a better deal by manifesting your current monthly income.

Auto loans without a co-signer are still a possibility. All you need to do is change your game plan, take the right steps and you can buy a car easily.