GST invoices, alternate data and cash-flow underwriting: How to unlock the $400 bn MSME financing opportunity

Shamolie Oberoi   /    Content Marketing Specialist    /    2022-05-24

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When it comes to MSME financing, the problem of thin-file borrowers and informal setups crops up time and again. Lenders usually run in the opposite direction when there’s not enough audited information about a businesses’ financial information and small businesses would rather avail informal financing than get into the maze of regulatory filings, auditors and maintaining formal financial accounts.

Thus perpetuates a credit gap of almost USD 395 billion. The way around bridging the credit gap is actually using more data points to underwrite rather than shutting the doors to small business borrowers. One of these innnovations is using alternate data such as transaction data from PoS terminals, cash flow based indicators through bank statements and GST invoice data.

With the GST ecosystem maturing and more businesses moving to the GST registered-fold, it makes perfect sense for lenders to utilize the GST data fetched through the portals, returns as well as other data aggregators to lend to businesses. 

Over 1.34 crore enterprises in India have joined the GST network - and their  reporting frequency ranges from monthly to quarterly reporting and submission of invoice level data in GST returns. This means rich data on:

- Cash flows -  Aggregate turnover -  Supply and purchases - Business mechanics

In short, it’s a goldmine of information for FinTechs to explore and improve their MSME lending products. 

Now let's dive in to the two distinct ways in which GST data can be leveraged for lending to MSMEs:

Monthly returns, electronic invoices, and e-way bills can be leveraged through financing mechanisms like the Trade Receivables Discounting System (TReDS). This platform facilitates the financing/discounting of the trade receivables of MSMEs through multiple financiers. 

These receivables can be due from corporates, government departments, and public sector undertakings. The receivables are confirmed by buyers through invoices uploaded by MSMEs on the TReDS. Financiers bid for confirmed invoices, and once an MSME selects the best bid, it gets paid by the financier.

The financier later collects the funds from the buyer. This method addresses a critical need of MSMEs - eliminating credit risk and encashing receivables on time.

The main objective of the TREDS platform is to address the critical needs of MSMEs i.e. the twin issues of promptly en-cashing receivables and eliminating credit risk.

Second, MSMEs could avail a GST business loan. These are unsecured loans that are given based on GST returns. The loan process is quick and convenient, especially so for smaller businesses that may not possess immovable collateral or a prior credit history. Apart from being collateral-free, other benefits of GST loans include quick disbursal and the opportunity to pay off prior loans via refinancing - where business owners switch lenders for a lower ROI than their present lending institution. 

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What role will FinTechs play?

Data generated from monthly and quarterly returns, e-way bills, and e-invoices presents FinTechs with a massive opportunity to reinforce their position in the risk assessment space. They can integrate with GST compliance applications to access this data and analyze it effectively with artificial intelligence-based tools and algorithms.

It will result in deeper insights into the financial health of MSMEs, and these insights can improve access to credit for such businesses that have traditionally been left out of the banking system. With the aid of GST data, FinTechs can further innovate to develop precision credit products for MSMEs and continue to bridge the credit gap.

Conclusion

At its core, GST was introduced by the Government of India to create a single tax on the supply of goods and services, from manufacturer to consumer. One of the many reasons this matters to FinTechs is that it has enabled digitization of the entire indirect tax system - and the reams of data produced as a result could go a long way in increasing access to credit to underserved segments such as MSMEs.

It’s time for the policymakers to open up the GST ecosystem further and allow secure access to data that can empower small businesses to get formal credit at easier terms and rewards them for their compliance rather than punishing them for their small size