Faster loans for SMEs through Deskera credit ratings

What is the biggest problem that small and medium enterprises in India face today? It is access to monetary assistance from financial institutions. Despite the Government starting several initiatives, including goading banks to diversify their portfolio, setting up of an entire ministry, establishing dedicated stock exchanges, the problem has failed to diminish. According to a survey conducted by Deskera, a business software provider in South-East Asia, 70% of the SMEs still feel that gaining access to credit is a tough nut to crack.

Deskera’s ERP seeks to address this very problem by providing credit ratings to banks on the basis of the collection of real-time data on an organization’s inventory, payroll, invoices, business resources—cash, raw materials, production capacity—and the status of business commitments, in one word all the operations of a company.

“These days getting credit for our operations is a big hurdle. Banks are reluctant to provide credit to us due to the track record of some enterprises which do become sick and insolvent over a period of time. I could never have thought that an enterprise software could achieve this. It is a good step and will facilitate loans that are easy to apply and get,” said Yuvraj Singh, an entrepreneur from Bathinda running a supply chain enterprise.

“Through the launch of the credit rating scheme, our ERP will validate an enterprises’s business on the basis of its data and act as a facilitator of loans to the sector, which is already cash-strapped,” said Shashank Dixit, CEO, Deskera.

Credit ratings strike at the root of India’s NPA crisis

India is facing its worst ever financial crisis since 1991. Bad loans grew to Rs 3,41,641 crore in September 2015, and as a percentage of the total loans, went from 2.11 to 5.08%. Big corporates account for the lion’s share of the NPAs, whereas small and medium enterprises have kept up with their financial commitments.

“There was a time when every bank worth its name went hyper on granting loans in the name of diversifying their portfolio. All that hype was premised on a miscalculation that the economy would boom. But, it did not, leaving many financial institutions in the lurch. Rather than running after big corporates, banks should lend more to the SME sector, which have a better track record. Moreover, the credit-sanctioning process has to be more thorough,” said one of the leading bankers on condition of anonymity.

The lesson learnt is that financial institutions should be more forthcoming to the SME sector and this can only be achieved by building trust between the lender and the borrower. Most of the problem is arising out of the fact that banks don’t have visibility into the workings of an enterprise. Deskera’s credit ratings, which will be based on data gathered through Cloud-based ERP, will provide banks with insight into the operations of an enterprise, overcoming the reluctance on part of institutions to provide financial assistance to the SME sector.

SMEs by their very nature and composition are inclined to be more financially disciplined and meet their obligations since they are already battling a trust deficit. In such a scenario, where they have been more disciplined than their financial counterparts, it’s a travesty of justice that they still find loans hard to come by. On the other hand, despite being the biggest defaulters, big corporates continue to enjoy unabated assistance from all quarters.

For this to change, Deskera’s credit rating is a step in the right direction. Since the ERP is the digital gateway to all the transactions of a company, it is best situated to make a thorough evaluation of the financial health of a company. The Deskera ERP would, after assessing the financials of a company, issue credit ratings on the basis of a comprehensive stock-taking of a company’s operations such as inventory, invoice generation, accounting, tax compliance, and payroll, among other things. According to the Deskera survey, 62% of the respondents felt that Cloud-based technology along with data Analytics could help in weeding out wilful defaulters from genuine borrowers.

Win-win for enterprises and lending institutions

The rating scale would be aligned with that generally used by banks, helping them better assess the creditworthiness of SMEs that want to apply for fresh loans or those seeking enhancement of their existing limits. Enterprises stand to benefit in another way as well. The ratings would enable SMEs assess their own financial strengths and operating performance, eventually leading to corrective measures. Operating performance would also help the buying departments of big corporates assess SME capabilities, thus improving the chances of SMEs going on to become vendors for those big companies. A third-party independent evaluation of SME strengths will enhance the transparency and credibility of the process.

“Once we get the ratings, we would be able to approach big corporate houses for vendorship. Through this, they will also get to know how we function and what our individual capacities are,” said Shakeel Ahmad Khan, an independent entrepreneur from Kanpur, Uttar Pradesh.

The development would lead to greater trust between vendors and buyers, paving the way for banks to lend at attractive rates of interest. The ratings would aid SMEs involved in global trade too and could be used in the future as a benchmark by exporters and importers.

Banks can manage risk better with the help of Deskera ratings

Financial institutions stand to benefit too. One of the major benefits to banks would be an accurate evaluation of the strength and weaknesses of an SME unit and thus enabling banks to manage their credit risk better.

Avoid high fees for credit ratings

Credit rating agencies charge a substantial amount for conducting ratings. For an SME it may not always be possible as some small enterprises are operating on really thin margins. But using Deskera ratings, they can avoid paying those hefty amounts.

SMEs are the backbone of Indian economy

The SME sector is one of India’s largest and is generally considered as the backbone of Indian economy, providing 45% of all manufacturing output. This sector is also critical to the generation of employment in the country. It employs around 40% of the country’s workforce and generates millions of jobs, especially at the low-skill level. It’s time to lend support to the sector for the greater good and for an inclusive prosperous country.