When the government first introduced the Goods and Services Tax (GST) in 2017 to the Indian economy, there were several concerns about crossing over to this new tax regime. As it happens with every change, the new tax regime was not readily accepted by all. Nevertheless, it helped to re-organise the small and medium enterprises sector which contributes to about 30 to 35% of India’s GDP.
The success of the GST reform is highly debated and whether it is beneficial to all or not, it will take some more time to assess its positive results. But, it has certainly brought about a huge benefit in this digital era of analytics. GST has paved its way to create a tremendous opportunity of generating financial data of companies, which was otherwise not possible.
The access to this data has provided a huge platform for fintech companies to assess the creditworthiness of the applicant and make data-driven decisions in credit lending to small and medium-size businesses.
GST: The Basics
The goods and services tax or GST reform has been one of the most radical tax reforms in India, which unifies multiple indirect taxes including VAT, Octroi and Service tax under a single system. It was introduced with an aim to bring about greater transparency, uniformity, and accountability within the market.
Over 8 million businesses are registered under this system generating around 58 invoices per month. Also, as an effect of GST, businesses would have to file around 37 returns per year as opposed to just 2 returns in the previous system.
Technology Shift – Pre and Post GST
One of the key issues when it comes to SME financing is that this sector is highly informal. Often, there was no scope or access to data points regarding their cash flow because SMEs operate in unique business models. As a result, it caused a lot of heterogeneity, making credit appraisal a cumbersome process.
There was no sure shot way to assess the credit standing of the borrower and most of the time lending companies had to rely on a uni-dimensional assessment of data using the credit score.
Even though the switch to GST was a nightmare of sorts for SMEs, it has generated a vast amount of financial data that can be used in multiple ways to solve the credit problem. The shift to GST has led to more SMEs transferring from a desktop-based system to cloud and mobile-based system.
The data generated subsequently will serve as the most credible data on the supply chain of the business. Along with its e-bill format of sales, it will ensure that there will be absolute precision and transparency of the business. In a nutshell, the data generated from the GST can help to assess the financial health of the business in terms of its cash flow, supply chain and sales.
Leveraging GST Data for Flow-Based Lending
Under the GST regime, the buyers of goods and raw materials can claim input tax credit which has already been paid by their suppliers. This creates a transparent cycle where buyers are mandated to have proper invoices as well as ensure that taxes have been paid by the suppliers so that they can get tax credits.
As a result, there is s greater tax compliance in the entire chain and there is a record for every transaction including sales and purchases. Such record-keeping is useful for fintech companies when they undertake credit assessment as they can cross-verify financial statements provided by the applicant with the actual data that is available in the GSTN or GST Network.
Instead of relying solely on traditional lending parameters including credit scores, previous credit history or financial data that applicants provide, utilising the GSTN data point will help to bridge the gap. This will enable fintech companies to cater to the working capital requirements of SMEs with minimal documentation and quick loan disbursal.
In addition, it will also help fintech companies to create customised lending products tailored to the specific credit requirements of each borrower. As you gain access to a standardised and centralised network of real-time data from the GSTN, you can simplify your loan lending process. From loan origination to assessing the creditworthiness of the borrower, it will your loan servicing process hassle-free and cost-effective too.
Advantages of Using GST to Assess Loan Applicants
Make the shift from traditional asset-based lending process to data-based lending by gaining access to consented GST data. Get your hands on firsthand information of turnover and cash flow with great accuracy. Here are the benefits of using GST in your analytics of credit assessment:
1. Make Lending Customer-Centric
Gaining insights from the GSTN will help you discover an accurate and personalised profile of the loan applicants, which in turn helps you deliver personalised loan offerings with competitive interest rates that cater to the need of the end user.
2. Access to Vast Amount of Data that Can be Used to Gain Multiple Insights
With GST, you can access data that includes:
- Purchase Data – Inward supply information about goods and services and insights on trends
- Sales Data – Outward supply of goods and services, aggregate turnover, HSN or Harmonised System Nomenclature – wise classification of merchandises summary with financial health trends
- Customers Data – Understand the details and nature of customers across products and their breakdown
- Geography – State-wise Bifurcation and breakup of Sales
- Vendors Data – Access to top vendors list across products and their breakdown in detail
- Public Data – Compliance status and GST registration details
3. Uncover False Positives
You can verify if the applicant is providing the right financial information by comparing real-time information from the GSTN. Do away with false positives and assess if the borrower will be able to repay the loan through understanding the financial health of the business. Identify and differentiate false information and weed out prospective defaulters to lower your loan defaulter rates.
4. Multi-Dimensional Assessment of Creditworthiness
Rather than relying on data provided by the applicant and on the credit score, you can gather data across various points from the GST information and make a thorough assessment with a quick turnaround time.
By building a relevant statistical model from data-driven platforms of GST, credit score, bank statements, KYC, etc. fintech platforms can access instant insight into the overall credit behaviour of the applicant.
Evaluate Applicants With Data-based Lending Using Finezza’s GSTN Analytics
The true power of data goes beyond its availability and aggregation, the actual worth of data lies in its power to generate insights and using it for your operational excellence. Simplify your credit assessment process by leveraging GST data from Finezza’s suite of loan management software.
The high-end analytics of Finezza’s loan management system provides a detailed analysis that takes into consideration several data points including the GSTN, multi-credit bureau analysis, bank statement analysis and more.
India is expected to witness a surge of development across the SME sector and this involves more lending to meet the capital needs of growing companies. Avail the great opportunity of nurturing the MSME ecosystem of India.
The GST system of India is a win-win for both companies who can seek new loans using their transactional details and financial institutions that can provide quick capital resources after assessing the financial position of the business.
Get in touch with us at Finezza, if you are looking for a comprehensive lending lifecycle management software.