Fear of lending to MSMEs arises from their lack of financial transparency and data. In order to get a better view of the creditworthiness of MSMEs, their digital footprint via Facebook, SMS and GPS is revealing valuable insights for banks and financial institutions.

To establish the credit worthiness of your enterprise, it is essential to maintain transparency in showing digital credit trail and maintaining proper books of accounts. But small businesses and MSMEs suffer from what is called as a 'thin-file', where the information available is not enough to come up with a lending decision.

Thus, to facilitate MSME loan without collateral lenders have come up with a new form of credit rating based on studying the digital footprint of MSMEs to ascertain the authenticity of the data. By monitoring customer’s GPS locations on their smartphones, monitoring their SMS messages, studying their online shopping histories and Facebook activities, the lenders are able to gain an insight into the personality and reliability of the borrower. The profile derived from this study assures the lender about the loan applicant’s intentions and ability to repay the loan.

FinTech Firms

FinTech firms act as intermediaries, collecting relevant data from the applicant and passing it on to the lender. Traditionally, banks in India have verified the authenticity of loan seekers through physical background checks and paperwork. However, digital records are more time-effective than physical paperwork.

Underwriting Credit

By embracing technology, underwriting credit to MSMEs is easy using a combination of financial data such as balance sheets, P&L statements, credit histories, and alternate data such as the transactions undertaken with their vendors and suppliers.

Violation concerns

This way of gathering data might seem like a violation of privacy. But, it is collected only after the prior consent of the applicant. Loan seekers are assured of its pure business nature, and are free to divulge as much or as little data as they desire.

Collateral-free loans

Now, gaining an MSME loan without collateral can be difficult, if the lender is not assured of the creditworthiness of the MSME. Also, micro units, most of the times, are unable to provide collaterals. However, several government-backed schemes facilitate credit to small businesses by providing an MSME loan without collateral, at reasonable interest rates. which also play a role of sources of working capital for these business entities.

Prominent among government initiatives is the Mudra loan offered by Pradhan Mantri Mudra Yojana. It provides funding to non-corporate and non-farming micro, small and medium scale enterprises whose lending requirements are under INR ten lakhs.

Eligibility criteria for Mudra loans

The following is the Mudra loan eligibility criteria:

1. Small manufacturers

2. Artisans

3. Fruit and vegetable dealers

4. Shopkeepers

5. Individuals engaged in agriculture (livestock, poultry, pisciculture, etc.)

Individuals need to meet the Mudra loan eligibility requirements to avail the scheme benefits. Depending on their eligibility, they can get MSME loans up to Rs. 10 lakhs, which have been made collateral free under RBI norms. They are also required to provide various business statements and a report projecting their revenue as part of a financial evaluation to assess Mudra loan eligibility.

By tracing an MSME’s digital footprint, lenders are able to arrive at suitable credit ratings by analyzing their credit history, loan repayment behaviour, online behaviour etc. On the basis of credible ratings, MSMEs can then benefit from availing an MSME loan without collateral, at a discounted interest rate for business finance.

Entailing minimal documentation, collateral-free funds up to Rs.30 lakh, a unique Flexi loan facility and quick approval, Bajaj Finserv Business Loans are a hassle-free solution for your business finance needs.