Data-driven credit for SMEs

May 6, 2020

Summary: SME lending in India has caught the attention of Bankers and FinTechs alike. Lending to SMEs is expected to increase up to 23% by 2023, and data will be the driving force behind this growth. The opening up of alternative data sources and the ease of access to APIs have made credit assessment robust and easier for lenders and customers. Initiatives like GST(N) and Bharat Bill Pay System (BBPS) can be utilised to harness the digital footprint of the prospective customers as well as set up a formal assessment system in place. Leveraging data and analytics will be the game changer for lenders as it will help them disburse more loans and manage risk better.

Small and Medium enterprises or SMEs are of keen interest to lenders of late, and there are several reasons why. As the informal manufacturing sectors of the world, with a predominant presence in developing economies, SMEs produce goods, provide jobs, and generate revenue. While they positively impact the economy, they always have a pressing need for capital to grow their businesses. SMEs provide a new customer segment for lenders to invest in and provide a landscape to experiment with new products and services with a good opportunity for returns.

SMEs: The treasure trove of opportunities

In India, SMEs contribute to one-third of the GDP, amounting to approximately to 38%. While this presents an interesting picture, traditional lending institutions like banks have stayed away from financing SMEs. Today, SMEs account only for approximately 25% of the total formal credit of around Rs. 100 lakh crores in India. These loans are mainly sourced in the name of the enterprise and in the name of individuals (could be self or family that will ultimately be used to support businesses). So why does a promising sector like this miss out on credit opportunities?

For starters, SMEs are unorganized. Most SME owners do not have a system in place that documents or regulates their income flow. In addition to that, cash-based transactions often leave little room to track the inflow of money, expenditure, and revenues. This deems them risky as per traditional lending evaluation because their creditworthiness is difficult to determine.

For those with some documentation in place, a standard evaluation procedure is submitting income tax return receipts or copies of bills and then extrapolating the information received. However, this is not a foolproof method as recent records may not always be available, and there may be computational errors, which again result in unreliable data. Thus, sourcing and verifying data is always a challenge, which further complicates customer assessment.

Data as an enabler

Over the course of time, new sources of data have emerged that have had a direct implication on lending. These data sources have amplified the digital footprint of a customer and are helping them establish their creditworthiness. One reason for the rise of these alternate data sources is increase in mobile penetration and last mile connectivity, coupled with decreased smartphone costs.

Today, alternate sources of data such as utility data ( telephone bills, electricity bills, gas bills, and so on), social data (Social profile, SMS data, Call logs, geolocation), and financial and tax data (GST, IT returns,) can be leveraged to derive insights about a prospective customer’s ability to pay and the likelihood to default. This coupled with credit bureau ratings helps customers in building a robust profile for themselves, while it helps lenders to critically assess a prospective borrower and perform superior risk assessment.

The extent to which data can leapfrog lending is that today more than 70 data sources are available for underwriting and present at least over 6000 data points for analysis. These can be sourced from bank accounts, credit bureaus, and GST (N). Moreover, emerging fintechs are helping lenders establish advanced analytics to make sense of this data and leverage it to lend better. Access to APIs have further enabled accessing third-party systems on a single platform, thereby helping lenders in decision making and establishing dynamic credit models.


Introduction of the Goods and Services tax has put forth a unified tax system that accounts for any tax paid for value addition at every step of the manufacturing and delivery process. SMEs have undergone a huge transformation in their operations since GST was introduced. There has been a surge in registration and licencing as well as filing of returns, particularly by SMEs in the INR 10 Lakh – 1 Crore segment. Since filing of taxes has become online under GST, all activities from registration to returns are done on the GST portal, leaving data trails at every step. This process places data at the core of every transaction and brings forward the much-needed formalisation to the unorganised SME sector.

Bharat Bill Pay

Bharat Bill Pay System (BBPS) is a single payment gateway for all utility bills that converges all forms of payment on a single platform, thus streamlining collection across India. The consumer pays bills through their preferred mode, banks and non-banks charge the amount and transfer the data to BBPS. After this, BBPS undertakes the settlement and forwards the amount and information to the recipient’s bank, and ultimately the recipient registers the successful payment.

Utility data is a promising data source that can help lenders in examining customer customer financials and determine their creditworthiness. Since BBPS is a one-point portal for all utility bill payment, the digital footprint captured through this platform is reliable.

Using BBPS APIs, lenders can source bill payment data of their prospective customers and determine their cash flow and expense pattern. This data can be extrapolated to build customer profile, even in case of little or unreliable documentation. While the customer enjoys the freedom to pay bills through online or offline modes, the aggregated network of agents and online modes ensures that everyone is covered under one hood, helping lenders access information from a single, reliable source, without having to follow up on multiple channels.

How does this help SMEs?

Formalization will lead to transparency in process, bringing visibility into business operations. The need to file tax returns complete with valid receipts at every step of the transaction, makes reliable, verifiable documentation inevitable. Since everything will be done online, the processes will be faster and seamless. With every data point created, it will help SMEs build their portfolio and create opportunities to establish their creditworthiness, thus helping them apply and qualify for loans. Furthermore, GST (N) is a body that is managing the IT infrastructure for GST-based tax filing for the government, tax payers, and other stakeholders. Hence, using APIs of GST (N an), banks and NBFCs can tap into understanding SME customers better, curate customized loan products, do away with paper-based documentation, save time and resources on verification, and cut operational costs, presenting a win-win situation for everyone.

The road ahead

A recent report by the BCG states that digital lending for SMEs is to set increase to approximately 21% by 2023 as compared to the current rate of 4%. This growth is attributed to the digitization of lending and the availability of data as well as intelligence to augment operations.

BBPS and GST present promising opportunities for building a data-based roadmap for the SME lending sector. For an economy that is increasingly data-rich before being economically rich, BBPS and GST will only further aid lending initiatives of Banks and NBFCs. For a credit-starved sector like SMEs, this presents a lucrative picture for access to finance, which will ultimately lead to their growth and augment their contribution to the economy. Lower operational costs, robust IT infrastructure, faster processing, inclusivity, transparency in processes, one-point contact interface, and efficient services are some of the many perks that lenders will enjoy on using data-driven technologies.

Unless banks adapt to changing technological trends, Fintechs will be the driving force behind SME lending and will soon emerge as the leaders in this sector because of the data-first, innovation-driven approach. For SMEs, all these avenues will only open doors to building credibility, structured operations, using customized products, and ultimately generating more revenue in their businesses.