Credit and trading insights: The need of the hour for businesses to analyze early signals and red flags


Over the past decade, the digital lending approach has taken the financial ecosystem by storm. The crises faced by the world in the face of the Covid-19 outbreak have only accelerated the need for an efficient, flexible, and technologically advanced financial lending and borrowing mechanism. Unlike traditional banks that are often hesitant to lend to businesses and individuals with low credit scores, new-age financial institutions have found more feasible ways to assess the return-capability of the borrower by going beyond just credit score. 

Most Indian businesses inadequately maintain their financial information, resulting in poor credit appraisal. In fact, out of 50 million Indian business entities, only 50 thousand have credit ratings. On top of that, these businesses, especially Small and Medium Enterprises (SMEs), have limited resources to communicate with prominent lending institutions. In the absence of such conventional financial data there are alternate sources of data possible from GST, PF contribution etc that aid in painting a better picture about the creditworthiness of such businesses.

Simultaneously, modern-day businesses are also required to give credit to customers, given that most bulk capital goods are transacted with credit. The primary problem is that some of these credits lose large sums of sales money, maybe because the customer cannot pay or simply turns out to be a rotten apple. Large corporations also face similar challenges with their suppliers and vendors. Sometimes, they make deals with people who are insufficient to deliver on their promises, resulting in hefty losses. As a result, leveraging credit and trading insights has become more important than ever for businesses to ensure safe and seamless lending to customers. 

Credit and trading insights are becoming the flag bearers of safe lending mechanisms

The first rule of safe lending is to effectively determine the creditworthiness of the borrower. Simply put, it is the process of identifying the ability of the borrower to pay back the sum without defaulting on time or amount. To do so, lending institutions gauge the borrower’s previous financial track records, especially those indicating timely payment of installments, revenue obligations, and future business prospects. Credit and trading insights drawn from alternate data also presents us with real time checks on litigation data, compliance filings like MCA and GST and this can provide colour on the ‘intent’ or ‘willingness to repay’ of the business. By studying the trends of PF payments, GST data based on consent one can also get a deep understanding of the ‘capacity to repay’ of a business. 

In this context, credit and trading insights have proved instrumental in verifying a borrower’s creditworthiness. 

An enhanced analytical approach, data intelligence, and automated technology have driven the growth of the fintech market. Ultramodern features like credit and trading insights can aid banks, other lending institutions, and businesses to expand their customer base significantly and ramp up their profit margins. By using futuristic technology and data analysis, organizations can quickly determine the creditworthiness of borrowers, suppliers, vendors, and customers despite the absence of conventional financial documentation. Since corporations are often aligned with large distributors and dealer networks, it is essential to evaluate their creditworthiness to mitigate credit risks. 

The pivotal role of EWS and ECR tools in risk and fraud detection 

Learning from multiple distress incidents, banks and lending institutions have understood how to efficiently monitor borrowers’ credit risk and digital footprint by leveraging automated Early Warning Systems (EWS) tools. In fact, they have also started using algorithm scores such as Trust Score and Enhanced Credit Reports(ECR) to determine the due diligence of borrowers. It is high time that corporations start learning to leverage these tools as well. Through substantial credit insights and thorough monitoring, identifying riskier batches of borrowers, vendors, dealers, and suppliers will be far more efficient. 

Trading insights predominantly help in customer discovery. In layman’s language, trading insights aid lenders or businesses to efficiently organize ideal and non-ideal customers/networks. Alternative insights can also help institutions ascertain ‘high growth, thin file’ borrowers/suppliers/vendors by identifying their credit capabilities despite their lack of credit history. 

Final Word

The distress of the Bhushan Power and Steel sale that was halted in a test for bankruptcy law is still fresh in the minds of most corporations and businesses. This incident not only brought colossal financial damage to the banks but also resulted in a considerable loss for Engineering, Procurement, and Construction (EPC) contractors. It is proof that today corporations also need to remain vigilant to reduce the chances of being in a network with someone untrustworthy. 

Before taking a customer, borrower, supplier, vendor, or dealer onboard, it is imperative to meticulously study their financial records, quality assessment, competitive strengths and weaknesses, and future growth prospects. Simultaneously, it is equally crucial to deduce early red flags like inconsistencies in growing revenues, constantly increasing debt-to-equity ratios and poor corporate governance. These factors also help predict possible credit deterioration. Correctly ascertaining a potential customer’s creditworthiness is an effective and vital way to mitigate possible financial risks. A non-ideal customer can easily disrupt the cash flow, thereby suffocating the blood source of your entire lending institution. 

Leverage the many benefits of credit and trading insights to ensure that you don’t lose money because the counterparty is inefficient or, worse, a fraud. In fact, use these tools and data insights to make the right pick in the beginning and yield the benefits of a robust, cutting-edge insightful system to run your business profitably. 

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Disclaimer

Views expressed above are the author’s own.



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