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    More than meets the eye: How fragmented data creates credit models for nano entrepreneurs


    Credit and Finance for MSMEs: Building alternate credit models and disseminating credit is just the first step in the neo-lending journey. With the help of data and AI/ML models, we can enable the growth of nano enterprises by offering customized solutions.

    By Pravash Dash  

    Credit and Finance for MSMEs: The success of any economy depends on the success of its small businesses. These businesses are closely entwined with local economies. As small businesses grow, they become the major generators of employment, local development, and general economic expansion.  

    India is home to 10 million such small businesses, or nano entrepreneurs — as much as the population of Sweden. If each of these businesses could grow, then the cumulative impact on local communities would be tremendous. But to achieve this growth, nano entrepreneurs need timely access to credit, and this is where the ecosystem is failing. Today only 10 per cent of India’s small business owners have access to formal financing. 

    However, there is a way to bring 100 per cent of these businesses into the fold of formal finance, and the work already is underway. Since the Covid-19 pandemic began, most of the country’s nano entrepreneurs have opened bank accounts and more than 75 per cent have smartphones, enabling them to engage in digital transactions. In urban areas, more than 50 per cent of nano entrepreneurs have made at least one digital payment or received a relief payment digitally. All of these activities have resulted in nano entrepreneurs leaving behind data trails, albeit in a fragmented form, which could be stitched together to build alternative credit scores that would qualify these businesses for loans. 

    How neo-lending fills in the gaps 

    Nano entrepreneurs are excluded from the financial system because they lack the traditional data required by lenders to get loans. Most nano entrepreneurs do not have documented proof of income because they conduct the bulk of their business in cash, lack a credit history, and operate in the informal economy, placing them in a dark area for traditional lenders. The few nano entrepreneurs who are able to access credit receive templatized loans that do not meet their unique business needs.  

    A neo-lending approach solves these problems by considering alternate ways to build a credit score and customizing financial tools. Nano entrepreneurs might not have traditional financial data, but they produce multiple data trails. With the help of the Jan Dhan-Aadhaar-Mobile (JAM) trinity and India Stack, more nano entrepreneurs are coming into the digital fold. Most have bank accounts and are beginning to use digital payments, which creates data that new-age lenders will look at to determine credit scores.  

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    Layered on top of it is the data that exists in a nano entrepreneur’s ecosystem. These could come from the nano entrepreneur’s interactions with local microfinance institutions, cooperative banks, self-help groups, or nonprofit organizations. The valuable data gathered by these institutions help to fill the gaps in nano entrepreneurs’ digital data trails. When these data points are brought into a common platform, new-age companies can use artificial intelligence (AI) and machine learning (ML) to access and leverage this data to create alternate credit models. 

    Lending enables nano growth  

    Building alternate credit models and disseminating credit is just the first step in the neo-lending journey. With the help of data and AI/ML models, we can enable the growth of nano enterprises by offering customized solutions.  

    One major example of this is purpose-based lending. By looking at the ecosystem data gathered by grassroot organizations, new-age lenders also gain insight into nano entrepreneurs’ business cycles, which helps them create credit products suitable to their business needs. For instance, a kirana store that has a turnover of $2,600 (Rs 2 lakh) a month with average inventory cycle of 15 days would not require a loan for six to 12 months. Instead, the owner would need a loan of about $200 (Rs 15,000) to purchase a few boxes of biscuits immediately and for 15 days only.  

    Purpose-based lending models can meet these kinds of needs to ensure nano entrepreneurs maintain liquidity through credit and can continue supplying goods and services to their communities. Another way of doing this is to inject the credit amount into the supply chain itself. This helps the nano entrepreneur focus their credit amount in areas with the largest impact, enabling them to grow faster. 

    More opportunity ahead 

    There is no dearth of data when it comes to nano entrepreneur financing. By building alternate credit scores using data trails, we can enable India’s 10 million nano entrepreneurs to drive growth in their communities and local economies. As more data is collected from this segment and credit scoring models strengthen, nano entrepreneurs are gaining new access to credit to expand their businesses.

    Pravash Dash is MD & CEO of Arthan Finance. Views expressed are the author’s own. 

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