Understand Risk Management for MSMEs

In this SMEStreet exclusive, we sit down with Shalinee Mimani, Chief Risk Officer of Godrej Capital, to discuss the pressing challenges MSMEs face in today’s volatile market. As the backbone of the economy, MSMEs often find themselves navigating a complex web of financial, operational, and market risks. Shalinee delves into how businesses can effectively identify and prioritize these risks and how Godrej Capital is evolving its risk management and underwriting practices to ensure the growth and sustainability of MSMEs. From embracing new technologies to leveraging data-driven strategies, Shalinee provides valuable insights that can help MSMEs thrive amidst uncertainty.

Here are the edited excerpts of the interview:

1. What are the most critical risks facing MSMEs today, and how can they effectively identify and prioritize these risks?

It’s hard to not get passionate when speaking about MSMEs. They really are the backbone of the economy, driving innovation, creating jobs, and pushing growth forward. But at the same time, they’re often walking a tightrope, where the smallest misstep can create big problems.

When we think about the risks MSMEs face today, it's essential to remember that "risk" for them isn’t just about financial numbers. It’s personal. It’s about their survival and growth. The reality is, MSMEs are incredibly diverse. The risks faced by a tech startup might be entirely different from a small manufacturer. But, despite their differences, there are a few common challenges that many MSMEs share.

Financial risk is usually top of mind. For many of these businesses, cash flow is everything. If payments are delayed or they run into unexpected expenses, it can quickly create a cash crunch. A single client not paying on time can lead to missed payrolls or delayed vendor payments, which could snowball into bigger issues.

Then you’ve got market risk. MSMEs often operate in more niche markets. This can be great when things are stable, but it can also make them more vulnerable to shifts in demand or competition. If a larger competitor steps in or if customer preferences change suddenly, it can be tough to pivot quickly enough.

Operational risks can be another big challenge. Many MSMEs rely heavily on a few key people or processes. If one critical employee is out or a key piece of equipment breaks down, it can really disrupt the entire business. Larger companies can absorb these hits a bit more easily, but for MSMEs, it can be a real struggle to recover from even minor disruptions.

And then there’s the regulatory and compliance aspect. Keeping up with changing tax laws, labor regulations, or environmental standards is tough, especially for small businesses that don’t have dedicated teams to handle these things. Falling out of compliance, even by accident, can lead to fines or slowdowns that many MSMEs just can’t afford.

So how do MSMEs identify and prioritize these risks? It all starts with taking a step back and understanding where they’re vulnerable. I often recommend business owners map out their risks—everything from financial, operational, and market-related to regulatory challenges. Once those risks are laid out, the next step is figuring out which ones could hurt the business the most. Financial stability is usually the priority, because without a steady flow of cash, nothing else really matters. After that, keeping operations running smoothly and making sure the business can adapt to market changes are key. It’s not enough to react when something goes wrong. Businesses that build in resilience, plan ahead, and remain adaptable are the ones that tend to weather the storms better. And in today’s uncertain environment, having that mindset is more important than ever.

2. How has Godrej Capital evolved its risk management and underwriting practices in response to recent economic challenges, including the adoption of new technologies or innovations?

You know, it’s been quite a journey navigating the last few years. The economic landscape has shifted in ways none of us could have fully anticipated. From the pandemic to inflationary pressures and changing consumer behavior, every business—including ours—has had to adapt. For Godrej Capital, it was about evolving in a way that made us stronger, more resilient, and more innovative in how we approach risk.

If you look at how things used to be, risk management and underwriting were much more traditional, relying heavily on historical data, financial statements, and human judgment. While those elements are still critical, the recent economic challenges have forced us to rethink how we approach these processes. It became clear that we needed to be faster, more agile, and, importantly, more data-driven. This is where technology came into play.

One of the biggest shifts has been the use of data analytics and AI in our risk assessments. We’ve always had data, but now we’re using it more intelligently. Today, we can analyze customer behaviors, market trends, and even macroeconomic indicators in real time, which helps us make quicker and more accurate decisions. For instance, we’re able to better predict potential defaults or risks associated with particular sectors, even before they fully materialize. It’s about being ahead of the curve rather than catching up once the damage is done.

Another exciting area is the automation of our underwriting processes. A few years ago, underwriting was largely a manual process, which, while thorough, was also time-consuming. Now, we’ve integrated machine learning algorithms that can sift through enormous amounts of data—both financial and non-financial—and flag potential risks much more efficiently. This doesn’t just speed things up, but it also allows us to catch nuances or patterns that human eyes might miss. Of course, human judgment is still crucial, but technology has helped take some of the heavy lifting off our shoulders.

The adoption of alternative data sources is another innovation we’ve embraced. Traditionally, we relied on formal financial data to evaluate creditworthiness, but in today’s environment, that alone isn’t enough. Now, we’re looking at other indicators, like digital transaction patterns, payment behaviors, and even addresses, to form a more complete picture of the borrower. This has been especially helpful for segments like MSMEs, where traditional credit histories might not fully reflect their actual risk profile.

Of course, all these innovations are great, but they come with their own set of risks. We’ve had to adapt our internal processes to ensure that we’re not just adopting technology for the sake of it. Every new tool or data set we bring in is rigorously tested for accuracy, fairness, and compliance with regulatory standards. After all, the goal is to manage risk better, not to introduce new ones.

So, to sum it up, our risk management and underwriting practices have evolved to be more data-driven, faster, and more predictive. Technology has played a big role in this transformation, but we’re also making sure that we keep a balance between innovation and the human element. The world is more unpredictable than ever, but I think these changes have positioned us well to navigate whatever comes next.

3. What strategies can MSMEs employ to manage risks associated with changing consumer behaviours or market trends, and how does Godrej Capital support them in this?

When it comes to MSMEs, managing risks related to changing consumer behaviors and shifting market trends can feel like you're constantly trying to hit a moving target. The marketplace is evolving at a faster pace than ever, with digital transformation, changing customer preferences, and competitive pressures making it crucial for businesses to stay agile.

For MSMEs, one of the most important strategies is to stay flexible. Unlike larger organizations, MSMEs have the advantage of being nimble. They can pivot their products or services quicker, but only if they’re paying close attention to what’s happening around them. Regularly tracking customer feedback, keeping an eye on industry trends, and even watching what competitors are doing can offer insights into when and where to make changes. It’s about being proactive rather than reactive.

Another effective strategy is diversifying offerings. If a business is overly dependent on a single product line or customer segment, any shift in consumer behavior can hit them hard. By offering a broader range of products or services, or by tapping into different customer demographics, MSMEs can spread out their risk. This can also include exploring new distribution channels—whether it's online platforms, partnerships, or even exporting to new markets.

Embracing technology is no longer optional. MSMEs that leverage data analytics to understand customer behavior better will have an edge. Whether it’s using customer relationship management (CRM) software to track preferences or social media listening tools to gauge public sentiment, data-driven decisions can provide clarity in times of uncertainty. Businesses that harness these insights can adapt their marketing, product development, and customer engagement strategies quickly.

Now, here’s where Godrej Capital comes into play. We understand that navigating market shifts can be overwhelming, especially when access to resources is limited. That’s why one of the key ways we support MSMEs is by offering tailored financial solutions that allow for more flexibility. Products like our Flexi Funds are designed specifically to give businesses the breathing room they need, whether they’re responding to market changes or seizing new opportunities. This can be especially useful in times of uncertainty when having quick access to funds can make all the difference between pivoting successfully or falling behind.

Beyond financial products, we also support MSMEs through programs like Nirmaan, which is all about helping them build their digital presence. Digital transformation isn’t just about tech for tech’s sake—it’s about opening new revenue streams, reaching new customer bases, and staying competitive in a changing market. By providing guidance on things like setting up e-commerce platforms, marketing strategies, and even adopting financial technology, we help MSMEs navigate these changes more smoothly.

We’re also committed to providing resources and insights. Whether it’s through partnerships with platforms like CRISIL or creating content that helps business owners understand market trends, we aim to equip MSMEs with the knowledge they need to make informed decisions.

At the end of the day, managing risks in a rapidly changing market is all about staying informed, being adaptable, and having the right support system in place. With Godrej Capital, MSMEs don’t have to face those challenges alone. We’re here to provide not just funding but also the tools and insights to help them thrive in an unpredictable environment.

4. How does Godrej Capital strike a balance between supporting MSME growth and ensuring sound risk management and underwriting practices?

Striking a balance between supporting MSME growth and ensuring sound risk management is something we take very seriously at Godrej Capital. It’s a bit of a tightrope, but it’s one we’re committed to walking because we understand the critical role MSMEs play in the economy. On the one hand, these businesses need access to capital to grow and evolve; on the other, we have to ensure that the lending decisions we make are based on solid, responsible underwriting practices.

One of the first things we focus on is personalized financial solutions. We don’t take a one-size-fits-all approach. Each MSME is unique, with different needs, risks, and growth trajectories. By tailoring our financial products—whether it’s through something flexible like our Design Your EMI option or offering unsecured loans—we’re able to provide MSMEs with what they need to scale their businesses without overburdening them with rigid repayment structures. This flexibility encourages growth, while also allowing us to keep a close eye on risk, adjusting terms if needed.

Another key element is data-driven underwriting. Traditional underwriting models may not always capture the true potential—or risk—of an MSME, especially if their financials are informal or if they operate in a niche sector. So, we’ve expanded our risk assessment toolkit. We’re using alternative data sources like digital transaction histories, market behavior, and sector-specific insights to get a more nuanced understanding of each business. This helps us support MSMEs that might not have a long credit history but show strong future potential.

At the same time, our focus on technology has enabled us to manage risk in a more sophisticated way. We use AI and machine learning models that analyze vast amounts of data—both financial and non-financial—to predict potential risks before they become issues. This allows us to lend confidently while making sure we’re not exposing ourselves to unnecessary risk. These tools give us the ability to fine-tune our underwriting models in real time, so we can continue supporting MSMEs even when market conditions are volatile.

At Godrej Capital, we’re also very aware that supporting MSMEs isn’t just about providing capital—it’s about building a sustainable ecosystem. Platforms like Godrej Nirmaan are designed to give MSMEs the support they need to grow, including digital training, access to new markets, and mentorship opportunities. By helping them build stronger, more resilient businesses, we’re helping them grow and become credit-worthy.

So, how do we strike that balance? By being both flexible and disciplined. We support MSMEs with financial products and advisory services that fuel their growth, while using innovative, data-driven underwriting practices to manage risk. It’s about making sure we’re doing our part to foster economic growth without compromising on the stability and sustainability of our own lending practices.

5. How have underwriting practices at Godrej Capital adapted to the changing financial needs and profiles of MSMEs, particularly in emerging markets?

You know, the financial landscape for MSMEs, especially in emerging markets, has evolved dramatically over the past few years. At Godrej Capital, we've been very conscious of these changes and have actively adapted our underwriting practices to meet the shifting needs and profiles of MSMEs.

In many emerging markets, MSMEs may not have formal credit histories or well-structured financial records. This has forced us to move beyond conventional underwriting models, which relied heavily on things like balance sheets, profit-and-loss statements, and traditional credit scores.

To bridge this gap, we’ve embraced alternate data in our underwriting process. Rather than just looking at historical financial data, we now consider digital transaction histories, payment behaviors, and even inventory turnovers for businesses that may not have a lengthy credit history. For instance, an MSME with a solid record of online payments and strong vendor relationships could be a good candidate for credit, even if they don’t have a formalized financial history. By adopting this broader view, we’re able to support a wider range of businesses that would otherwise struggle to secure funding.

Another adaptation has been our increased use of technology and data analytics. In emerging markets, volatility is often higher due to factors like regulatory changes, and evolving consumer demands. To navigate these challenges, we’ve invested in AI-driven models that help us assess risk more dynamically. These models allow us to evaluate a broader range of variables—from market trends to the specific risks faced by MSMEs in certain sectors. The result is that we can offer more tailored lending solutions, while still maintaining a firm grasp on risk management.

We’ve also recognized that MSMEs in emerging markets often have different cash flow cycles compared to more established markets. To accommodate this, we offer more flexible loan variants such as Flexi Funds – an overdraft like facility or our Design Your EMI feature that allows businesses to structure their repayments in a way that aligns with their cash flow, whether it’s seasonal turnaround or periodic bulk revenue. This flexibility has been especially important in markets where cash flows can be unpredictable, and it gives MSMEs the breathing room they need to grow without being overwhelmed by rigid repayment structures.

Additionally, we've made a strong push toward financial inclusion. We’re currently present in 40 cities and service over 180 locations. Many MSMEs in emerging markets are run by entrepreneurs who may be first-time borrowers or lack formal education in finance. To address this, we’ve introduced initiatives that go beyond just offering credit — we’re providing growth and operational help through our platform Godrej Nirmaan. By enabling businesses and making them credit-worthy, we hope to help them manage their finances, reduce the overall credit risk, and set these businesses up for long-term success.

Our approach has really evolved to become more inclusive, data-driven, and tailored to the unique challenges of MSMEs in emerging markets. We’re not just focused on lending responsibly; we’re also committed to supporting the growth and sustainability of these businesses by offering them the tools, flexibility, and knowledge they need to thrive.

6. What role does technology, such as AI and data analytics, play in enhancing Godrej Capital's underwriting process, and how has it improved risk evaluation for MSMEs?

Technology, especially AI and data analytics, has significantly enhanced our underwriting process at Godrej Capital, particularly for MSMEs. Traditional underwriting often relied on static data like credit scores, but today we use AI-driven models to analyze a broader range of factors, including digital transaction histories, cash flow patterns, and non-financial data. This allows us to assess creditworthiness more accurately, even for businesses without formal credit histories.

With analytics, we can quickly detect patterns and anomalies, like irregular payment behaviours or market shifts, helping us identify potential risks early. Predictive analytics further allows us to model future performance and tailor financial solutions, such as flexible repayment terms with Design Your EMI, to match each MSME’s unique business cycle.

The use of alternative data has been especially crucial in supporting MSMEs in emerging markets, where traditional financial metrics may not fully capture business health. AI also streamlines the underwriting process, automating routine tasks and enabling faster, more accurate lending decisions, without sacrificing risk management rigor.

To sum it up, technology has made our underwriting more data-driven, proactive, and personalized, enabling us to support more MSMEs while maintaining robust risk controls.

7. How does Godrej Capital tailor its underwriting to support MSMEs across diverse sectors with varying risk profiles, while integrating broader economic indicators and market trends into the assessment?

At Godrej Capital, our underwriting for MSMEs focuses on understanding the diverse financial profiles and growth stages of each business. Rather than taking a one-size-fits-all approach, we recognize that MSMEs come in all shapes and sizes—some are just starting out with limited credit histories, while others are more established but may have different financial needs.

One way we tailor our underwriting is by looking beyond traditional financial metrics. For MSMEs that might not have formal credit histories or extensive financial records, we tap into alternative data—such as digital payment behavior, supplier relationships, and transaction histories. This allows us to build a more complete picture of the business’s financial health and capacity, ensuring we don’t miss out on lending to promising enterprises just because they don’t meet conventional criteria.

Additionally, we’ve introduced more flexible lending solutions to adapt to the varying cash flow cycles MSMEs experience. For businesses with fluctuating revenues, such as those with seasonal sales, we offer products like Design Your EMI, which lets them align repayments with their income streams. This flexibility helps MSMEs manage their finances more effectively, while still allowing us to maintain a clear view of potential risks.

We’ve also embraced technology to strengthen our risk management. AI-driven tools allow us to process a wide array of data points quickly and accurately. These tools help us spot trends or anomalies in MSMEs' financial activities that may signal opportunities or risks, enabling us to make more informed underwriting decisions.

Our approach is about balancing support with careful risk evaluation. By leveraging technology, alternative data, and flexible solutions, we can tailor our underwriting practices to meet the diverse and changing needs of MSMEs, while ensuring that we stay on top of any potential risks. This allows us to support their growth without compromising on the quality of our risk management practices.