How GST data is a key to the SME credit lock

The introduction of the Goods and Services Tax (GST), in 2017, was a paradigm shift in the Indian taxation regime. Along with all the complexity associated with the implementation of the new regime, there are some significant long term benefits created due to this policy change. Access to credit has been a significant problem for MSMEs in India, and the GST regime can help mitigate this issue to a vast extent through a data-driven approach to lending.

MSME finance is largely unstructured today

Financial and technology literacy of MSME business owners

Leading economic researchers and supply chain experts cite that the MSME segment in India has a long way to go when it comes to business finance and compliance awareness.

There has been a recent shift to online financial services but it is slow and sporadic. These factors have led to banks and, even the leading new age fin-tech services, to rely on offline, traditional middle-men like loan agents and DSA’s for creating and sustaining a customer base.

There is a significant need for large scale initiatives with both government and private entities partnering to increase financial and technological literacy in MSME’s. One such laudable initiative is Tech Saksham by CII, which is creating technology workshops throughout the country, but the impact will be long term. Many lenders today are coming up with tech-driven solutions like credit to businesses based on debit/credit card sales data. These Point of Sales based loans help increase both credit and sales. But small businesses, typically in tier 2 / 3 cities, are still slow in promoting non-cash transactions, and these form a majority of 6.3 Cr MSME’s in India.

Lenders relying on traditional credit scoring methods

The traditional and currently widespread method of defining creditworthiness by lending institutions takes into account the credit history and credit scores of business owners. This model has several issues:

• Limited avenues to asses new to credit businesses with no or little credit history
• Lack of skills of business owners, to adopt business practices conducive for finance ratings and to improve credit score
• Non-accounting of sectoral features of a business or seasonal variations in businesses

Complex underwriting and disbursal process

Traditional lenders rely on complex and non-standardized appraisal criteria to process loan applications by MSME segment:

• Long-list of documents required with physical verification at every step that adds to the time, cost and accuracy of verification
• Nonstandard process for appraising specific business planes in specific business domains which often runs into problems due to lack of structured knowledge in business owners
• The involvement of third party agencies in last-mile verification processes adds to the complexity and turn around time for disbursal
• The complexity of collateral requirements and related documentation

How GST data can revolutionize access to credit

The foremost contribution of GST data, which today covers almost 1.3 Cr businesses, is laying a bedrock, for a data-driven approach to multiply access to credit for MSMEs, which is one of the fundamental requirements to unleash the next growth cycle in our economy.

As adoption of technology grows, even in compliance space, platforms like Optotax, a SaaS-based taxation platform used by over 5 Lakh MSME businesses, are providing structured GST data insights for creating solutions for compliance, commerce and, more significantly, capital access for these businesses. There are several advantages to a credit ecosystem driven by GST data:

GST is the most credible data source on a business profile

Every business records all its formal transactions on sales and purchase side with invoice level details, every month in the GST compliance process. This data can be analyzed to derive key business profile indicators like :

• Growth trend of business and projected cash flows
• Risk factors such as limited suppliers, price fluctuations in inputs, etc.
• Seasonality variations in revenues

.. and many other such factors.

A more accurate representation of profile quality that can be used to create custom products for each sector

GST data can be used to create sectoral benchmarks, and thus custom credit products for various business profiles. For instance, an agricultural commodities business is susceptible to seasonal variations and low margins and thus comes under high risk for general credit-model, for a general business loan product. But using GST data one can assess an agricultural commodity trader in a new light, if its performance outdoes benchmark business performance in agricultural commodities sector, created by collecting GST data for a larger sample set of similar businesses. Thus a sector specific loan product can be carved out that accomodates season variations via seasonal weighted repayment schedule.

Simplified appraisal and verification process

As GST provides instant online access to credible data on business health, this can help create a data-driven automated verification process that reduces the need for physical documents and complex multi-party verification.

GST data can help build solutions to educate business owners on good financial practices

This data can also be used to help business owners maintain proper creditworthiness and financial health. Simple scoring dashboards or “Business health meters” can be provided to business owners, that point out clear steps to improve and maintain profile health every month, after automatically analyising the business data at invoice level both on sales and purchase side. This can even be extended to automated financial advisory services. For instance, an automated dashboard can alert a business to find alternate suppliers for input, if it observes a price rise trend from its existing suppliers.

With the trinity of structural reforms in compliance, technology adoption and widespread internet penetration, the MSME ecosystem in India, is looking at a fertile ground of data-driven solutions. GST data can help plant the seeds of change in credit space, to help unleash growth.