According to Investopedia, ”Underwriting is the process through which an individual or institution takes on financial risk for a fee. This risk most typically involves loans, insurance, or investments.”

Simply put, underwriting is a process by which financial institutions like banks or NBFCs take the guarantee of paying off loans of an institution or an individual in case of their loan delinquency. They give this guarantee by charging a certain amount to the individual/company, in this case.

The SME Wave

The small and medium businesses (SMEs) in India include 63.4 million units and account for nearly 30% of India’s GDP, employing about 460 million people.

Thus, we notice that SMEs make up one pillar of the Indian Economy. While there is a surge in the number of SMEs, there is also a surge in their aspirations to grow & expand their business. With expansion, comes the necessity of a line of credit and a variety of loans.

Let us take an example of Sharmaji, the same local grocery store who we spoke about while understanding the revival of the Indian economy. Sharmaji wants to expand his single store grocery into a multi-chain supermarket. To fulfil his ambitious dream, he will require a business loan. He checks out various lenders like Banks, NBFCs, and even NeoBanks.

Sharmaji finally zeroes down on ABC, an NBFC, as his option. He meets with Ramesh, the local branch manager of ABC. Sharmaji optimistically provides details about himself, his business and his plan to make his grocery store into a multi-chain supermarket.

Traditionally, Ramesh would check Sharmaji’s bank statements, CIBIL score and other records. Typically, these are the statements available with Financial Institutions. Ramesh finds out that Sharmaji is borrowing a loan for the first time! Thus, Sharmaji does not have a CIBIL score. Ramesh now finds it arduous to determine whether or not to approve Sharmaji’s loan.

This problem is not faced by Ramesh alone. Several Banks, NBFCs, NeoBanks and financial lending institutions face the same challenge. Let’s understand the problem better.

The challenge consists of two crucial nuances:

A. Low Depth of Information 

• The coverage of information has no real depth in terms of understanding the customer.
  Traditional data like bank statements, salary slips, CIBIL score & other records provide only a fraction of information about an SME.

   

  B. New-To-Credit Customers 

• A large part of India’s potential credit customer base has no records with traditional bureaus. With a target market of 400 million working professionals, only 50% are credit active. Meanwhile credit penetration in working professionals from 18-33 years is only 8.3% according to CIC.

 

This may lead to poor credit penetration, and smaller loan book size which in turn leads to less revenue and lesser profits. So, how can we disburse loans to NTC customers who can repay the loans without delinquency?

Before we jump into the solution, we need to understand what the underwriter has to know about the borrower:

 

• Intent to repay – Depends on the behaviour/personality traits/character of the person at helm 
• Capacity to repay – Depends on the income of an SME 
• Stability to repay – Directly proportional to the stability of the industry the SME is in. In case, it is a salaried job, whether the Industry will continue to grow, what the CAGR % for that industry looks like & hiring or firing rates of the industry.

Traditional data lags behind in giving a 360 degree perspective about the customer.
The disbursement of high velocity loans and unsecured loans is growing exponentially, so the need to analyse a customer before dispersion is growing more than ever.

 

Can Alternative Data help?

Credit Bureaus as per mandate can only provide intelligence in terms of financial records i.e bank statements. This results in two problems –

• NBFCs do not have often enough visibility about the Intent, Capacity or Stability of a customer to repay the loan 
• NTC Customers are completely left out in terms of evaluation

These challenges can seriously impact the profitability of the loan provider. Here, Alternative Data comes to their rescue.

Data Sutram’s Alternative Data platform has the capability to process data from over 250+ sources including Satellite, POS, Smartphones to be able to give intelligence on people & give more insights that can comment on their stability, intent & capability to repay the loan.

Leveraging Alternative Data for Credit Underwriting:

To underwrite a Small/Medium Enterprise we can check the Intent, Capacity and Stability with alternative data. The following table outlines how Data Sutram helps underwriters/loan providers bridge the customer analysis gap with alternative data parameters.

In case of an SME, the input parameters can be Address and GST ID.

To study the intent to repay, one can take into consideration GST details and Pin Code delinquency.
To understand the capacity to repay, GST Turnover, Income, Footfall trends and Market Area% can be taken into account.
The stability of the industry can be determined by Affluence, Industrial CAGR%, transactional and footfall trends. General Industry trends and POI attributes also play a key role in deciphering the stability.

Once we input the data, we can avail 4 types of output parameters. They are:

1. GST Details
2. Location Attributes
3. Amenity Counts
4. Industry Trends     

These output parameters, when aggregated accurately,  provide the best alternative data source to enhance the underwriting process. These data driven insights empower the financial institutions in more ways than one. It grants them the opportunity to increase loan book size, reduce Non-Performing Assets (NPAs) and higher growth rate of customers. It not only propels Return on Investment (ROI) but also reduces cost of resources.

With multiple data partnerships, Data Sutram clearly holds the edge while providing alternative data for SME underwriting. With an exponential rise in Digital Lenders, the country is riding the wave of digital loans. With the rise of digital loans, comes the necessity for an efficient and profitability focused Underwriting process.  An underwriting process which includes Alternative Data in its arsenal allows Banks and NBFCs to enhance their decision making and reduce delinquency. 

To know more about SME Underwriting with Alternative Data, book a demo at Data Sutram