Driving MSME Lending in India with Risk Intelligence and Alternate Data

While the primary responsibility of preventing frauds lies with lenders themselves, the RBI has advised them from time to time about the major fraud prone areas and the safeguards necessary for prevention of frauds. RBI has also been circulating the details of frauds and unscrupulous borrowers and related parties who have perpetrated frauds on other banks so that lenders could introduce necessary safeguards / preventive measures by way of appropriate procedures and internal checks, and exercise caution while dealing with them.

i. Through its letter ‘ RBI/2015-16/75 DBS.CO.CFMC.BC.No.1/23.04.001/2015-16 ‘ RBI had recommended lenders to monitor 45 Early Warning Signals to monitor loan frauds.

The circular had indicated that tracking of Early Warning Signals (EWS) in loan accounts should not be seen as an additional task but must be integrated with the credit monitoring process in the lending process so that it becomes a continuous activity and also acts as a trigger for any possible credit impairment in the loan accounts.
By integrating early warning signals into the credit monitoring process, lenders can manage loan fraud risks effectively.

What are the challenges in the way credit monitoring is done by FIs today ?

• Dependence on Lagging Indicators: Most data points monitored by Lenders are lagging indicators, resulting in delayed information and potential losses.
• High Cost of Monitoring and Recollections: Physical audits and visits are time-consuming and costly, making it impractical for widespread borrower monitoring.

There are many cases where lenders identify stressed accounts after it has gone delinquent and lost its capacity to pay back.
This leads to a series of follow ups, notices, physical recovery measures and in end cases, legal recourse with an additional cost of lost liquidity and high risk premiums.

With an early identification of a stressed account, There are various ways in which FI can improve its recollection e.g. restructuring the loan, considering moratorium, providing additional liquidity, etc.

To enable Lenders, seize this opportunity EquiDEI offers a real time turnover authentication enabling better underwriting, delinquency management and automated reporting.

Some of the significant challenges faced by financial institutions when lending to Micro, Small, and Medium Enterprises (MSMEs):

• Misreporting of Financial Statements by MSME borrowers: Inaccurate bookkeeping, tax evasion, and varied company structures hinder accurate borrower assessments.
• Inadequacy of Current Initiatives: Current frameworks, such as Account Aggregators, are not fully operational for industrial borrowers and present operational challenges.

By fetching early warning signals, FIs improves loan recollections, identifies upsell opportunities, and reduces monitoring costs. The platform gathers data from shop floor IoT sensors, providing insights into MSME borrower activity levels and performance.

EquiDEI, one of the proud participants of The Digital Fifth Accelerator, provides real-time data, any production downtimes, drop in sales, and business risks at the borrower’s end can be identified much earlier which serves both FI and the browser both time and money. They have completed a proof of concept (PoC) with the Small Industries Development Bank of India (SIDBI), and the platform is now looking for larger adoption in the MSME Lending space.