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Risk Assessment in Working Capital Lending: Best Practises and Pitfalls to Avoid

Supply Chain Financing

In the current financial year, businesses are expected to require Rs 11.2 lakh crore in working capital, up from Rs 8.7 lakh crore in the previous year.

As a result, businesses will need more capital to meet their operational expenses, such as inventory purchases, salaries, and other expenses.

As the lending sector becomes increasingly competitive, it is also crucial for lenders to understand the importance of risk assessment in working capital lending.

In this article, we will discuss the meaning of risk assessment in working capital and the best practices and pitfalls to avoid when assessing risk in working capital lending.

What Is Working Capital? 

Working capital is the amount of money needed to run a firm on a daily basis, such as paying for goods, employees, rent, and other operating expenses. It is the sum of a company’s current assets and current liabilities.

Cash, accounts receivable, inventory, and other short-term assets comprise a company’s current assets, while current liabilities comprise accounts payable, short-term loans, and other debts due within one year.

Working capital lending is borrowing funds to support a company’s short-term operational needs, such as wages, rent, and inventory purchases.

Why Do We Need Working Capital Loans?

Here are some of the reasons why working capital lending is necessary:

  • Managing cash flow

Cash flow changes are expected in businesses due to a variety of factors such as seasonality, economic cycles, and unanticipated expenses. Working capital lending assists businesses in managing their cash flow by giving access to funds when needed.

  • Supporting growth

As they expand, businesses may need to invest in additional inventory, equipment, or personnel. Working capital lending assists in financing these expenses, allowing businesses to develop without depleting their cash reserves.

  • Keeping operations running

Unexpected expenses or a decrease in revenue may occur in various instances. Working capital lending helps bridge the gap between income and expenses, allowing firms to continue operating despite tough times.

  • Avoiding cash shortages

Businesses that lack sufficient operating capital may struggle to pay their payments on time, resulting in late fees, penalties, and lowered credit scores. Working capital lending allows businesses to avoid cash constraints and maintain a solid financial status.

How Does Risk Assessment Work in Working Capital Lending?

Risk assessment in working capital lending is the process of evaluating a borrower’s creditworthiness and determining the possibility of payback of a loan used to finance the company’s operations.

The assessment examines several aspects that may affect the borrower’s capacity to repay the loan, including their financial situation, credit history, collateral, and industry/market trends.

Risk assessment aims to assist the lender in determining the right amount of credit to issue to the borrower and to reduce the chance of default.

A lender, for example, may utilise risk assessment to examine a small firm that requires a loan to purchase inventory. To estimate the likelihood of repayment, the lender may examine the company’s financial statements, credit history, and industry/market trends.

What Are the Best Practices for Risk Assessment in Working Capital Lending?

Working capital loan risk assessment is a  process that evaluates a borrower’s creditworthiness and determines the right amount of credit to offer.

The steps involved in risk assessment in working capital financing are as follows:

  • Initial Screening

The first phase in the risk assessment process is to screen the borrower to see if they match the lender’s basic eligibility requirements. Verifying their identity, business registration, and creditworthiness are all part of this process.

  • Data Collection

The lender then gathers information on the borrower’s financial situation, credit history, collateral, and industry/market trends. Examining financial documents, credit reports, and collateral values is part of this process. In addition, the lender may undertake site visits and interviews with the borrower’s employees.

  • Risk Analysis

Lenders analyse the borrower’s creditworthiness, credit scores, collateral values, and industry/market trends to evaluate the borrower’s creditworthiness and potential risks. Additionally, the lender assesses the borrower’s ability to generate cash flows and repay the loan.

  • Credit Decision

Based on the risk analysis, the lender makes a credit decision on whether to approve or deny the loan application. If the loan is accepted, the lender calculates the right amount of credit to offer and the loan’s terms and conditions.

  • Monitoring and Reporting

Once the loan has been disbursed, the lender will conduct continuous monitoring and reporting to ensure that the borrower is abiding by the loan’s terms and conditions.

Examining financial documents, credit reports, and collateral values is part of this process. The lender also monitors the borrower’s credit history and any changes in their financial situation.

The overall risk assessment in working capital lending involves gathering and analysing data to determine a borrower’s creditworthiness.

Avoid These Common Risk Assessment Pitfalls in Working Capital Lending

In the lending industry, risk assessment is critical to working capital lending, but if not conducted thoroughly, it can lead to significant pitfalls, including:

Over-reliance on collateral

To secure the loan, the lender should not rely primarily on collateral. In the event of a default, collateral may not be adequate to cover the loan amount.

Ignoring market and industry trends

The lender should not overlook market and industry trends. Failure to consider industry and market developments may result in lending to a company with limited future possibilities.

Inadequate financial statement analysis

The lender should not depend simply on the borrower’s financial statements without undertaking a thorough examination. Inadequate analysis may result in a loan being made to a company that cannot repay it.

Failure to undertake site visits

Without site visits, the lender should not depend exclusively on the borrower’s financial statements. Site visits allow you to learn about the borrower’s operations and management procedures.

Summing Up!

Risk assessment in working capital lending is critical for lenders to ensure timely repayment of loans. Analysing the borrower’s financial accounts and reviewing the borrower’s credit history are effective practices for risk assessment. Effective risk assessment strategies can help prevent defaults and reduce losses for lenders.

Fintech tools can help in risk assessment by leveraging advanced algorithms and machine learning techniques to analyse large amounts of data, identify trends and patterns, and generate insights that can help lenders make informed decisions.

Finezza is a fintech tool that offers risk management services to banks and NBFCs, enabling them to offer their customers a complete, fast, and error-free lending solution. Providing end-to-end loan management and credit evaluation solutions for lending businesses,

Finezza’s advanced document identification and verification capabilities you can easily extract information from verification documents such as PAN cards, balance sheets, and much more. In addition to saving time, this automated feature increases workflow speed with no chance of human error.

Hence, financial institutions can better anticipate financial and non-financial risks, such as strategic, funding, legal, political, etc.

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Can a Virtual Credit Card Affect a Customer’s Credit Score?

Loan Origination System

The rise in online transactions has increased security threats to critical financial information. Virtual credit cards have become popular in recent years as a preventive method. These cards allow consumers to use their credit cards online without the risk of exposing their credit card information.

Consumers, however, are also concerned about the impact virtual credit cards may have on their credit scores.

In this article, we will explore how virtual credit cards work and how they can impact a customer’s credit score.

How Does a Virtual Credit Card Operate?

Virtual credit cards work similarly to traditional credit cards, with a few key differences.

When customers sign up for a virtual credit card, they are issued a unique, temporary credit card number linked to their existing credit card account. The virtual card number can be used for online purchases like a traditional credit card.

However, it comes with an additional layer of security.

For example, the virtual credit card number is temporary and can be cancelled anytime. It is rendered useless if a cybercriminal accesses the credit card information. This measure protects the customer’s actual credit card number from being compromised.

Additionally, customers can set spending limits and expiration dates for their virtual credit card numbers, which helps minimise fraud risk.

What Does a Credit Score Stand for?

A credit score predicts your credit behaviour based on information from your credit reports, such as whether you will repay a loan on time.

Businesses use credit scores to decide whether to offer you a mortgage, credit card, auto loan and other credit products, as well as for tenant screening. Using the score, credit limits and interest rates are also calculated.

Credit scores range from 300 to 850, representing your credit risk. Creditors and lenders use the credit score to determine whether to approve a new account application.

How Does a Credit Score System Work?

If you are eligible for a loan or other credit account, your credit score may affect your interest rate and other terms.

A scoring model determines a credit score range, but it is generally characterised by the following:

  • 300-579: Poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very good
  • 800-850: Excellent

No “magic number” guarantees approval for a new credit account or a specific interest rate from a lender.

Higher scores, on the other hand, typically indicate that you have demonstrated responsible credit behaviour in the past, which may give potential lenders and creditors more confidence when evaluating a new credit request.

Why Do Credit Scores Matter?

When you apply for credit, the credit issuer may check your credit score first. The procedure is the same when applying for a credit card, a loan, or a mortgage.

Therefore, credit reports and scores are reliable indicators that allow a financial institution to assess your ability to repay the debt on time. They may also use internal scoring mechanisms to determine whether an individual is creditworthy.

How to Maintain a Good Credit Score: Insights from Finance Experts

Here are some tips to help you maintain a healthy credit score when using a virtual credit card:

1. Monitor spending

First, Keep track of your virtual credit card spending and stay within your credit limit. This will help prevent over-limit fees, which can negatively impact your credit score.

2. Pay bills on time

Late payments can significantly impact your credit score, so it’s important to pay your virtual credit card bills on time. Automate your payments so you won’t miss a payment.

3. Keep credit utilisation low

Your credit utilisation ratio, or the amount of credit you use relative to your credit limit, can impact your credit score. Keep your credit utilisation below 30% to maintain a good credit score.

4. Review your credit report regularly

Reviewing your credit report regularly can help you identify any errors or potential fraud and monitor your credit score. You are entitled to one free credit report from each major credit bureau every year.

What Is the Impact of a Virtual Card on a Credit Score?

Virtual credit cards have no direct impact on a customer’s credit score.

Credit scores are determined by payment history, credit utilisation, length of credit history, types of credit used, and recent inquiries. Whereas the virtual card generates a one-time-use credit card number for each transaction, so the virtual card does not impact a customer’s credit score.

However, if a customer uses a virtual credit card for a transaction and the merchant reports the transaction to the credit bureaus, the transaction may appear on the customer’s credit report and could affect their credit score.

The main benefit of virtual credit cards is that when a customer uses his or her virtual credit card, the transaction is reported to the credit bureaus just like any other credit card transaction.

Thus, using a virtual credit card can assist in building or maintaining a customer’s credit history, one of the most critical factors in credit scoring.

Final thoughts

The use of virtual credit cards for online purchases is convenient and secure. Although they can adversely affect a customer’s credit score, it depends on how they use them. The added security provided by virtual credit cards can help customers maintain or even improve their credit scores.

Credit scores must be used in the lending process because they provide lenders with information about a borrower’s creditworthiness.

Lenders are using fintech solutions to evaluate credit scores and make lending decisions. It also helps them analyse more data sources and provide a more comprehensive assessment of creditworthiness.

Finezza: Seamless Lending Lifecycle Management and Faster Credit Evaluation

Finezza is one such fintech platform that provides a suite of cutting-edge products, such as the Credit Analysis solution that allows you to evaluate various combinations of data from multiple credit bureaus to provide detailed information about a candidate’s creditworthiness.

Besides improving your credit score, this will also allow you to provide credit to a broader range of clients, which you would have previously rejected based on one credit score.

In addition, reducing the time it takes to process a loan application will result in quicker disbursements and improved loan management.

Talk to us today!

Working Capital Loans: Propelling Startups

Loan Origination System

Working Capital is a financial metric that, despite its technical definition, is better understood in the literal sense of the term which is, ‘the capital that works’. As a production factor, it generates revenue and ensures the continued existence of the other three aspects, such as labour, land, and entrepreneurship.

Working capital management entails controlling liquidity by balancing cash flows. It is a function that determines the survival of small businesses and startups in particular. Businesses have two options for generating necessary working capital: internally generated or externally sourced funds. To meet liquidity requirements, they can either reinvest business revenue in production or rely on external funding such as working capital loans. 

In the early days, startups rarely generate enough revenue to fund their operations, leaving loans as the only viable source of working capital funding.

Let us delve deeper into the topic.

Working Capital: Revisiting the Fundamentals

Working capital is defined as the surplus of a company’s current assets over its current liabilities. A positive working capital indicates that the company has enough liquidity to meet its short-term obligations, whereas a negative working capital suggests a possible cash shortage.

A firm’s working capital requirement is determined by the following:

1. Business type

Compared to service-based industries that generate intangible products, manufacturing firms will have higher overhead costs and cash requirements due to physical inventories.

2. Operating cycle 

The more “time-to-market” a product has, the more working capital the company will need. This holds true for service businesses that bill the clients after providing the service rather than securing upfront payments.

3. Business objectives

Whether the business wants to scale or maintain the current size of operations, its working capital needs will vary. If the company wants to expand its product line or enter new markets, it will need more research, development, and marketing funds.

Whatever the requirement, fledgling companies can rely on working capital loans to finance their immediate requirements or create a buffer for periods when there are fewer cash inflows.

What is a Working Capital Loan and Why do Startups Need it?

A working capital loan bridges the gap between a company’s receivables and payables. It enables businesses to run their day-to-day operations smoothly until their clients make payments. Also, it helps to cover recurring expenses like wages and salaries, rent, etc. and is not meant to fund the firm’s capital expenditures. Working capital loans have shorter repayment tenure and higher interest rates and can be either secured or unsecured.

When a company looks for outside funding to cover its operating expenses, it has two options. One method is offering equity to private investors such as angel investors or venture capital firms. The other is by availing loans to secure operating capital. Between the two methods, working capital loans offer more benefits for startups.

Advantages of Working Capital Loans

Here are a few benefits of working capital loans that startups can avail of:

  1. Simple and faster access compared to equity funding.
  2. No dilution of control in the firm as a result of equity sharing.
  3. Continuous access to cash in the form of lines of credit or overdrafts
  4. Lenders can offer repayment terms that correspond to the cash inflows of seasonal and cyclical businesses. This reduces firms’ repayment burden during non-operational months.
  5. Helps in inventory management by facilitating bulk purchases that offer discounts and fund inventory costs such as warehouse rents,  insurance costs, and cost of shipping, etc.
  6. Help in developing better partnerships with suppliers and clients. With sufficient working capital, businesses can pay their suppliers promptly and sometimes benefit from the discounts offered on upfront payments. Furthermore, they can offer extended credit periods to their customers without worrying about meeting expenditures.

Different Types of Working Capital Loans

From simple pre-approved credit limits for the firm’s current account to specialised trade finance facilities, various working capital loans are available that match the specific needs of any business. Some of these include,

  • Line of credit/ Overdraft– This is a flexible cash facility wherein the businesses can draw from up to pre-approved limits. Firms can withdraw any amount up to the threshold limit, depending on their needs. Usually, the eligible working capital limit is calculated based on the stock or accounts receivables.
  • Term Loans – Term loans are working capital finance extended for a shorter period, typically less than a year. Repayments must be made in fixed, regular instalments.
  • Accounts Receivables Financing and Factoring– These types of working capital funding are appropriate for businesses that do a lot of invoicing. Lenders loan money to businesses based on outstanding invoices.The fundamental difference between receivables financing/ invoice financing and factoring lies in the treatment of invoices. In receivables financing, such invoices are used as security, whereas factoring involves selling unpaid invoices to lenders.
  • Peer-to-Peer (P2P) Lending– Peer-to-peer loans are digital loans based on the crowd-funding model of financing and use online applications to connect borrowers and lenders. In India, the maximum amount that a single borrower can avail at a time through all P2P platforms is Rs.10 lakhs.
  • Business Credit Cards– Corporate credit cards are another attractive alternative source of working capital finance. Using a credit card for business purchases helps to build the startup’s credit score.

The Recap

Richard Branson once said-“Never take your eyes off the cash flow because it is the lifeblood of business”. If one applies the same analogy, working capital management becomes the circulatory system for the business. Rightly so, it is a measure of a company’s liquidity, operational effectiveness, and budget management, and consequently, its short-term financial health.

The shortage of capital is a major reason why many startups fail. A study conducted recently found that 47% of startup failures in 2022 happened due to a lack of financing and 44% due to funds being dried up. When access to working capital is limited in the bootstrapping days, it is sensible to turn to working capital loans to stabilise the cash flows.

This is why Finezza brings end-to-end loan management solutions and credit evaluation services to lending businesses. Our platform supports all administrative tasks involved in lending, from loan origination to NPA management.

Contact us today to learn more about our products.

Why Are Lenders Betting Big on Supply Chain Finance?

Supply Chain Financing

Micro, Small, and Medium Enterprises (MSMEs) are often considered the backbone of the Indian economy, and they account for approximately 30% of India’s GDP and employ close to 111 million individuals.

The COVID-19 pandemic posed many challenges across industries and disrupted supply chains. The current Russia-Ukraine war and periodic lockdowns in China have added to the woes of MSMEs, which also struggle to be a part of the traditional financial ecosystem.

Supply Chain Finance (SCF) offers a lifeline to this sector in these difficult times. In this blog post, let us discover how it can benefit the stakeholders and explore ways to improve its efficiency.

What Is Supply Chain Finance and How Does It Work?

SCF is a short-term working capital arrangement where an enterprise gets its supplier payments financed by an external financier. Supply Chain Finance involves three stakeholders: the supplier or the seller, the buyer and the bank or the financial institution (FI) that offers finance.

The business owners or suppliers sell their high-value invoices to a financial institution at a discounted rate to avail of short-term credit for meeting their working capital requirements. Buyers agree to approve their suppliers’ invoices for a lender to finance the operational capital requirements of a business.

SCF is available both in online and offline modes. Therefore, suppliers can raise invoices online on the dealers to avail credit instantaneously. The supplier and buyer benefit from this arrangement; the supplier gets faster access to funds owed to them, while the buyer gets more time to repay the dues.

On the due date, the buyer pays the financier the total price, and the FI gains from the difference between the discounted price paid to the seller and the total price received from the buyer.

How Supply Chain Finance Benefits All Stakeholders?

Supply Chain Finance benefits all three players of the ecosystem. The lenders are bullish about this mode of financing owing to the benefits it offers to all three participants paving the way for greater acceptance across the MSME sector.

1. Advantage To Suppliers

Here are some advantages Suppliers can avail of from SCF:

  • Suppliers receive immediate cash in hand against their unpaid invoices. Even though, at a discount, suppliers gain from instant liquidity.
  • SCF also results in reduced Days Payment Outstanding (DPO) for the supplier and eliminates the need for follow-ups for collecting payment.
  • They receive funds before the invoice due date and can utilise them for their working capital needs or pay other liabilities.
  • The supplier can use this process with other buyers to rotate funds more times within a year and increase their business turnover.
  • SCF offers them credit at lower rates compared to working capital loans, thereby reducing their finance costs.
  • Automation of systems helps them reduce operational costs.
  • The cash flow is streamlined, smooth and becomes certain.

2. Benefits to Buyers

Supply Chain Finance can help buyers in the following ways:

  • The buyer is relieved from the pressure of paying within 30 days as he gets an additional 30 days to make the payment.
  • A longer time for invoice payment gives the buyer more flexibility to use the available working capital till the payment due date.
  • SCF offers the benefit of reduced cost of goods purchased.
  • As payment is not an issue, suppliers are willing to provide a regular supply of goods, which ensures smooth operations.
  • It also fosters a stronger supplier relationship by providing a smooth working capital flow.

3. Helping the Lenders

Lenders can avail of a few benefits, such as:

  • Supply Chain Finance allows lenders to diversify their risk.
  • Lenders can utilise their underused funds to generate income through interest.
  • Their collaboration between sellers and buyers helps them increase their customer base and improves the opportunities for cross-selling products.

Why Are Lenders Bullish On Supply Chain Finance?

In light of adverse geo-political situations, businesses have been forced to look for innovative solutions to deal with rapidly changing market dynamics. Lenders have spotted a viable growth potential in the SCF model. It has helped organisations overcome their working capital woes while benefitting suppliers and assisting the FIs to diversify their risks and expand their operations.

The Supply Chain Finance sector is poised for a paradigm shift owing to digital adoption and technological advancements. Cash, as we understand, is the lifeline for any business and the working capital finance gap is a concern for most organisations. Automated cash inflows and outflows would help enterprises preempt and manage working capital gaps more efficiently.

Role of Technology in Supply Chain Finance

1. Leveraging AI and ML-enabled Fintech Solutions 

Artificial intelligence (AI) and Machine Learning (ML) provide real-time projections on changes in payment patterns which helps businesses take timely action to avoid a cash flow crunch.

Fintechs are offering cost-effective finance to MSMEs by leveraging technology. Customised ML models and alternate data points for assessing creditworthiness are helping NBFCs, and banks gain better insights into repayment patterns and predict defaults. AI and ML algorithms offer dual benefits: indicate defaults and identify potential financing prospects.

2. Deploying LMS

Innovative solutions like a Loan Management System can help lenders manage multiple loan types and varying repayment frequencies and assist in non-performing asset (NPA) management.

Emerging technologies like blockchain can promote the spread of supply chain finance to cross-border trades. As multiple players are involved in such transactions, the validity of shipments becomes a cumbersome task. Blockchain can help do away with a central authority to help make the process seamless and increase transparency for all players.

As Supply Chain Finance emerges as an alternative financing model, the contribution of MSMEs to the economy will rise further and drive India’s inclusive growth story.

Few Opportunities In Supply Chain Finance

  • E-commerce can help lenders support multiple supply chains.
  • FIs can fund backwards and forward integration along the value chain by adopting an integrated approach.
  • Underserved market segments like consumer durables, commodities, electricals, FMCG, and agro-industries hold great potential to fund their supply chains.
  • Digital platforms and automation allow FIs and stakeholders better system integration and information sharing.
  • Implementing a digital SCF platform offers benefits like automation, risk mitigation, tracking, and monitoring the end-to-end supply chain.

In Conclusion

With Supply Chain financing, MSMEs can access working capital at a lower cost and reduce their dependence on informal channels. It stimulates the growth and development of the sector by providing uncomplicated access to finance.

Finezza’s intuitive product suite comprising Loan Origination Software and Loan Management Software focuses on facilitating faster and more efficient loan management to assist financial institutions and other lending ecosystem stakeholders in monitoring and managing credit applications, processing KYC documents more quickly, and streamlining the entire lending process.

Talk to us to learn more!

How Can Embedded Finance Be an Innovative Gateway for the Lending Industry?

Loan Origination System

Technology has advanced so dramatically over the last decade that consumers can order a ride before arriving at their destination. In addition, they can pay utility bills without leaving their homes. In today’s modern world, instant payment systems are a part of our everyday lives, but where does the money come from? The answer is embedded finance.

But what exactly is embedded finance? It is the integration of financial services with non-financial services. It simplifies financial processes and enables consumers to access whatever they need when they need it.

For example, it allows customers to purchase and obtain credit in one location rather than visiting a physical bank to apply for credit and then make the purchase. Customer-facing digital platforms use embedded finance technology to integrate financial services into their offerings.

Let us elaborate in this blog post on a few aspects of embedded finance in this blog post.

What Is the Purpose of Embedded Finance?

Earlier, users had to be directed to a financial service provider at the point of purchase. For example, when booking airline tickets, you can purchase travel insurance. This friction does not contribute to a positive customer experience.

Businesses can sometimes risk losing all of their customers. Customers benefit from a more convenient checkout experience when a travel insurance plan or a BNPL option is embedded into the travel app, not to mention the additional revenue stream for non-financial firms through payment fees.

The appeal of embedded finance will only grow as the digital payments space expands. Today, many non-financial businesses, such as e-commerce players, merchants, and small enterprises, are adopting this strategy.

What Is Embedded Finance’s Role in the Lending Industry?

Embedded lending revenues are expected to increase by US $199,924.6 million by 2029, with a CAGR of 27.5%. Embedded finance allows non-financial companies to directly provide financial products and services to their customers, including loans and credit.

  • By embedding these services, lenders can provide more convenient and streamlined financial experiences for their customers. Additionally, it allows companies to offer tailored and flexible lending options, making them more attractive to customers.
  • Embedded finance is particularly beneficial to the lending industry because it allows companies to reach new customer segments and improve customer retention. For example, a car manufacturer can offer financing options specifically designed for car-buying, making it easier for customers to purchase a car.
  • Additionally, fintech brands are making inroads in the insurance market, developing innovative platforms, and developing contextual insurance products and services. This accelerates the growth of embedded finance in new markets. By 2032, the market may reach US$ 248.1 billion, up from $54.3 billion in 2022.

3 Key Players in the Embedded Finance Ecosystem 

An Embedded Finance Infrastructure comprises three key institutions collaborating to provide users with financial solutions.

1. Digital content platforms

Non-FinTech firms or businesses that own a customer-facing digital platform, such as a mobile app, a website, or a desktop application. They can offer customised financial solutions to customers entrenched within their platform due to their deep understanding of target audience segments.

2. Financial institutions

The purpose of banks, NBFCs, and microfinance institutions is dual. First, they offer financial services and are best suited to managing regulatory compliance and credit risk. Using their network and workforce, they can also process loan requests from the embedded finance ecosystem.

3. Finance infrastructure provider

FinTech company that develops APIs and SDKs to connect financial institutions to digital platforms. SDKs (Software Development Kits) are simply used to integrate functionalities into mobile or web apps. Embedded finance offers loan lifecycle UI, alternative data underwriting engines, customer service, and more as part of its platform/app.

How Does Embedded Finance Benefit Lending Institutions?

In addition to streamlining the integration of financial services into conventional non-financial services, embedded finance has several other benefits for the lending industry:

1. Easy customer acquisition

NBFCs can reach a large and appropriate customer base by collaborating with businesses and embedding their offerings on relevant websites and apps. Financial services can also be offered through websites and apps to riskier customers, which traditional lending methods can hardly achieve.

2. Relevant data collection

In addition to financial data, financial institutions have access to other data, such as shopping preferences and frequency of usage of specific services such as cab-hailing, etc. Therefore, they can curate specific financial products and cross-sell other offerings accordingly.

3. Simplified consumer management

With the companies running the websites and apps dealing with customers, the financial institutions’ and businesses’ responsibility for user lifecycle management is divided, easing the burden on the financial institutions to cater to queries, customer service, and so on.

4 Future Trends in Embedded Finance in the Lending Industry

Embedded finance in lending is expected to continue growing in the future, with several trends emerging ranging from:

1. Increased integration

Embedded finance will become even more integrated into non-financial products and services as financial services become a core component. This will make accessing financial services even more convenient for customers and increase the reach of digital lending platforms.

2. Increased use of AI and machine learning (ML)

Using AI and machine learning in digital lending platforms is expected to improve customer experience and make more informed lending decisions. This will allow for a more personalised loan experience for customers.

3. Increased use of open banking

Open banking lets customers share their financial data with third parties through embedded finance in digital lending. By utilising this data, digital lending platforms can make better lending decisions about their customers.

4. Increased use of mobile-based lending

Embedded finance in digital lending is expected to increasingly leverage mobile-based lending, which allows customers to access loans via mobile apps as mobile usage increases. By making it easier for customers to apply for loans, digital lending platforms can reach more customers.

Summing It Up 

Embedded finance has cut through much red tape, and business owners are looking to integrate payments and financial services into their software seamlessly. Increasing access to these services is inevitable.

For customers, embedded finance simplifies access to services, and for businesses, it increases customer touchpoints, cross-selling opportunities, and the customer experience.

With lenders focusing on customers and monetising through fees and subscriptions, the finance ecosystem has more players than ever with their markets, which is why fintech companies continue to innovate their solutions every day.

Finezza is one such tool. It is the ultimate solution for lending lifecycle management and credit evaluation. Our suite of lending management applications streamlines the lending process, making it easy for financial institutions to manage their loans and evaluate creditworthiness.

With Finezza, you can automate loan origination, underwriting, and servicing while gaining access to advanced credit evaluation tools. This means faster loan approvals, better risk management, and improved customer experience.

Talk to us to upgrade your lending process with Finezza today!

How Finezza’s Co-lending LMS Can Benefit Your Co-lending Process

Lending Lifecycle Management

Loan syndication by banks has always existed for large business loans. The real challenge is in the small and medium-sized enterprises (SMEs) market, which represents a significant share of the digital lending landscape in India. A conservative estimate puts this market at a whopping $300-$400 billion by 2025!

The Indian finance industry has long used the co-lending model of credit. The CLM has gained much more significance and has become a viable solution to liquidity and credit access issues due to the recent expansion of fintech resources and abilities.

After discussions with some of India’s leading NBFCs and fintechs, we at Finezza have built a co-lending compatible LMS (Loan Management System) that can streamline the lending process for all parties involved.

This new functionality has been precipitated by the keen interest and agreement of several large fintech non-banking financial companies (NBFCs) who have approached us based on our domain understanding.

What Makes Finezza’s LMS Highly Compatible With Co-Lending? 

Co-Lending-Diagram-Wide

Our co-lending compatible LMS is designed to handle the operational intricacies of co-lending effectively so that customers are not troubled in any way.

Co-lending involves the proportionate sharing of risks and rewards of loans between banks and NBFCs. This can present challenges in underwriting, loan processing, sharing of interest, charges collected, apportioning costs, and risks of loan defaults. When NBFCs have multiple co-lending partners, the process becomes even more complex.

An NBFC or a lender facilitates the loan and is the only point of contact for the customer. The RBI requires the NBFC to contribute at least 20% of the loan amount; the remainder can be from one or more co-lending partners. These partners can have different agreements with the facilitating lender regarding the distribution of interest, charges, penalties, and defaults.

Finezza’s LMS can handle all the complexities of different agreements so that customers can see their loans as a single entity. Let’s get into the core features of this platform.

Features of Finezza’s LMS That Will Raise The Efficiency Of Co-Lending

Finezza’s Loan Management System is designed to cater to the unique needs of the co-lending model as it simplifies complex co-lending procedures and offers numerous competitive advantages.

1. Streamline the Splitting of Risks and Rewards

When it comes to co-lending, businesses can face multiple challenges. Even though the bank and NBFC might lend at an agreed ratio, the bank and NBFC will often have different costs of funds.

So the most significant inefficiency the platform will handle is processing fees, delayed interest, and penal interest between banks and NBFCs. Splitting the money based on these different terms won’t be an operational nightmare when EMIs start coming in.

2. Personalised and Multi-View 

The bank needs a clear view of its 80% stake in the loan, and the co-lending platform will provide this by creating three views of the loan – 100% for the customer, 20% for the NBFC, and 80% for the bank. This way, the parties involved will clearly understand their investment.

3. Automated KFS Sharing

RBI’s guidelines state that the lender should share a Key Facts Statement (KFS) with the borrower. Finezza’s co-lending compatible LMS will automate this process.

4. Automated Reporting

The NBFC and bank must report their loan share to the credit bureau. The platform can also automate this operational hassle.

5. Automated Bookkeeping

The platform will also automate bookkeeping for this complex setup by generating the ledger and trial balances in line with the share of the participants on loan. The NBFC will know how much to return to the bank, and the latter will know how much to take from the NBFC.

Wrapping Up

The co-lending concept allows all stakeholders to be more adaptable, take bigger risks, and generate more revenue. It also enables the customer to obtain a loan from the formal credit market at a low-interest rate.

Co-lending also presents a fantastic business opportunity for banks and NBFCs in India. By partnering, they can fund many credit-underserved customers. The success of this business model depends on the technical competence of the co-lending LMS.

Finezza’s Co-lending Loan Management System removes operational inefficiencies and helps scale your lending operations. Our system makes it easier to process loans under the co-lending model and eliminates many of the inefficiencies that come with it.

Contact Finezza to book a free demo if you are a financial institution wanting to improve your Loan Management System.