Until a few years ago, Small and Medium Enterprises seeking a loan had to make multiple trips to banks or other lenders with company and project details, and could still go disappointed.
The problem wasn’t so much a bank’s unwillingness to lend but its inability to underwrite a customer due to lack of relevant data, said Gaurav Chopra, Founder of alternative lending marketplace IndiaLends.
Data is available in plenty today and several alternative lending startups such as Capital Float, LoanZen, LendingKart and CoinTribe Technologies have cropped up to provide loans to small businesses, applying extensive analytics and algorithms to make the process smoother and quicker. Many of these companies follow a three-step process. The first is an identification check.
“All the data that we use in decision making is collected online or electronically, from borrowers and relevant public and private sources,” said Amit Gupta, who leads data science at Bengaluru-based LoanZen. “Typical sources are banking data, government data on company identifiers, financials, marketplace data, social footprint data.”
Data is collected on the financial health of the applicant company, its transaction volumes, credit history, online footprint of the business owners, as well as the ingenuousness of the business. This is followed by evaluating the company’s ability to repay.
This includes analysing, say, a merchant’s transaction history in terms of volumes and their performance for a first-cut online footprint analysis. Post that, the merchant will be asked to provide bank statements that are analysed for the quality of cashflow transactions.
Based on all this data, alternative lending startups employ their technology to assign a risk weigh tage to the loan being sought before making suggestions to their partner non-banking financial companies, the lenders.
The final step is to assess the ability or the intention of an applicant to repay a loan, which involves scouring through past records of repayments and defaults, if any, which help the startup’s algorithm decide if it will be asafe bet to lend to the applicant.
Sequoia Capital-backed Capital Float and Mayfield-backed LendingKart have been able to reduce their default rate to less than 1% after evolving their database to include an increasing number of points ranging from physical location to cellphone bill payments.
“India is a credit-starved country, especially for small businesses,” said Shripati Acharya, Managing Partner of Prime Venture Partners. “Now we have an explosion of data and the ability to manipulate and derive conclusions.”
Source: The Economic Times