Lending to small and unorganised businesses presents significant credit risk, primarily due to the absence of credit history for assessment. Traditional methods of credit evaluation, such as predicting behavior based on credit history or analyzing cash flows and profitability through financial statements, often fall short in this scenario.
Shikhar Aggarwal, Chairman of BLS E-Services, underscores the importance of identifying and mitigating risks like credit default and market volatility. This approach not only ensures the stability of loan portfolios and minimizes losses but also promotes responsible lending practices. Aggarwal emphasizes that proactive risk management is crucial for MSMEs to demonstrate financial reliability and business acumen, essential for securing funding, growth, and operational success. Moreover, a robust risk management framework builds trust with financial institutions, improving loan terms and access to larger credit facilities, enabling MSMEs to innovate, expand, and navigate economic challenges effectively.
Ujual George, COO of Aye Finance, explains how his company overcame this challenge by developing a tailored underwriting model based on data science and a comprehensive physical presence. Aye Finance’s extensive workforce of 6,000 across 450+ branches nationwide plays a critical role in managing credit risk effectively through this “phygital” (physical + digital) model.
Aggarwal further elaborates on the multifaceted approach NBFCs use to manage risks during lending. This includes assessing liquidity profiles with seasonally adjusted fund utilization patterns, evaluating company profiles based on ownership, industry segment, location, and maturity level, analyzing repayment behavior and asset classification, determining creditworthiness through outstanding debt and credit scores, assessing collateral for secured credit, and considering external factors like economic conditions, business trends, and potential legislative changes that may impact MSMEs.