IT IS important for banks to look beyond their existing customer base and reach out to the vast number of micro and small enterprises (MSEs) which are deprived of bank credit. Alongside extending the reach of their banking services, there would be a need to improve and customise the products offered, fine tune the pricing aspects, and enhance the quality and efficiency of services. For this, banks need to have a proper business plan and delivery model that would harness the benefits of technology. The costs of banking transactions need to be dramatically reduced just as in so many other fields such as telecom, after the advent of technology.
Alternate appraisal techniques
We need to appreciate that the credit process in case of micro and small entrepreneurs cannot be identical to that of large corporations, where the borrower is able to provide detailed information about business plans and the firm’s financial statements and the lender carefully reviews the data using analytics that are time-consuming and expensive.
In view of the relatively small size of the loan, banks do not find it worthwhile to conduct an elaborate appraisal of SME credit proposals both in terms of value and profit. Therefore, in order that the banks can quickly conduct the appraisal of SME loan proposals without expending too much resources, it would be imperative to ensure the efficiency of the appraisal process.
Financial institutions in the developed countries use different lending techniques to provide funding to small firms. The banks, in these countries, use a version of a computerised loan-evaluation system, referred to as credit scoring, to assess would-be borrowers. The credit scoring approach, using computer technology and mass production methods, was originally designed to handle consumer loans, but are now being used effectively for lending to small businesses by predicting their potential loan delinquency. Credit scoring offers a modern alternative for the traditional method of evaluating loans for small businesses.
To expedite the credit flow to the MSEs, RBI, as a proactive measure, issued guidelines in May 2009, advising banks to start using scoring models for making lending decisions in case of all advances up to
R2 crore. However, despite, our instructions having been issued nearly five years back, we find that the use of credit scoring model in the real sense has not really taken off in India. Our assessment is that perhaps the lack of conceptual clarity on the subject could be one reason