A credit scoring model for financing small and medium enterprises is recently launched by Canara Bank.
It is important to understand that credit scoring can benefit multiple stakeholders, including lenders, borrowers, and the overall economy. For the lender, scoring leads to process automation which facilitates process improvements leading to many by-products such as improved management information, control and consistency. It also increases the profitability of SME lending by reducing the time and cost required to approve loans and increasing revenues by expanding lending opportunities as lenders can safely approve marginal applicants that an individual underwriter might reject.
Deepali Pant Joshi, Executive Director, Reserve Bank of India, said, “By launching the credit scoring model, Canara Bank has shown willingness and determination to expand credit coverage to this sector.”
According to Canara Bank official statement, the scoring model will reduce the arbitrariness and subjectivity in deciding the eligibility for loans and help in reducing the rejection rate of MSME loan applications. It is also expected to increase financial inclusion under the sector.
The model helps branch managers decide the eligibility of borrowers under the MSME sector to avail finance from the bank. The eligibility is decided based upon aggregate scores secured by the loan applicant on various parameters prescribed under behavioural, management, business and financial aspects. The scoring model will be used solely for the purpose of deciding the eligibility of the loan applicant to avail finance from the bank, Canara Bank said.