In a first for India’s fintech industry, U GRO Capital has filed a patent application with the Indian Patent Office for its score-card based underwriting model used to disburse business loans to micro-small-medium-enterprises (MSMEs) in the country.
When lending to MSMEs, lenders tend to be risk-averse because of credit quality reasons and due to a lack of formal data sources for MSMEs which are sparingly available. “The model tackles the unavailability of appropriate MSME database, by utilizing its unique classification technique leveraging the proprietary knowledge base and strength of statistical models,” the company said in a statement.
According to Subrata Das, chief innovation officer, U GRO Capital, one has to underwrite a sector in order to understand how individual MSMEs function within the sector. “Since there is no uniform data available, we have designed the score-card for each sector (8 in total) which we can use to understand how to underwrite businesses within the sector. Based on this we are able to assess the credit-worthiness of the MSME along with their credit score. The relative distinction that a score-card makes between borrowers can help us predict future defaults, as a low score borrower has a higher probability to default than a borrower with a higher score,” Das told MediaNama.
U GRO’s underwriting model, developed alongside credit bureau CRIF Highmark and credit rating agency CRISIL Ratings, creates a macro-framework for lending to a particular sector. Based on the macro-assessment churned out by the underwriting model, the company gets a general understanding of the industry and how best to understand each MSME borrower within the sector. This is done by analysing the historical loan delinquency patterns and cash flow within each selected business segment, the company says.
Traditionally, lenders would use credit history, financial documents like GST filings or bank statements and a physical verification to underwrite a loan. Most of these tasks were physical in the past, which would lead to delays in sanctioning loans. However, over time these processes have been digitised which is an improvement from the past but still leaves many MSMEs outside the ambit of the formal credit system. “Our score-card models automatically assesses the credit history of the borrower and we have automated the financial assessment as well. So we are able to sanction loans in less than an hour, after which we can assess the collateral if there is any,” Das said.
U GRO plans to target 250,000 MSMEs and extend loans worth over ₹30,000 crore in the coming four financial years. It added that the same model can be used for retail lending, trade finance and co-lending arrangements. The non-bank lender had started using the credit-score underwriting model since its inception and has disbursed ₹1,700 crore worth of loans through this model. “Our loan disbursements are back to pre-COVID level and in terms of demand, we are cautious about specific sectors and we are focusing on evaluating who best to lend to,” Das told MediaNama.