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Checking your CIBIL score update is probably more important now than ever. Bank of Baroda has recently offered a pioneering take on MSME (Micro, Small, and Medium Enterprises) loans: that of risk-based pricing. The Bank is now willing to offer lower rates of interest on MSME loans to those which they consider as having a high CMR or CIBIL MSME Rank. With the help of machine learning, the CMR is able to predict how likely an MSME loan is to become a non-performing asset (NPA) within a twelve-month time period since its disbursal.
What is CIBIL MSME Rank?
The MSME loan receives a rank on a scale between 1 to 10 based on their credit history data. A rank of 1 is the best possible CIBIL MSME rank, while a rank of 10 is the riskiest CIBIL MSME Rank. Naturally, the lower the CIBIL MSME rank, the lower is the risk of the loan turning into a non-performing asset. Hence, with the adoption of a risk-based loan pricing strategy with respect to MSME loans, Bank of Baroda is operating with the goal of making credit cheaper for those MSMEs that are performing well in the country.
Commenting on this move, the Executive Director of Bank of Baroda, Smt. Papia Sengupta said that the bank is credited with pioneering technology and innovation with the aim of driving credit penetration and business growth. She goes on to assert that the Bank of Baroda was among the very first banks in India that offered risk-based loan pricing with respect to home loans. The price was based on the candidate’s CIBIL score. Now, the Bank aims to do so for MSME loans as well, through the individual’s CIBIL MSME ranking.
Effects of CIBIL MSME Rank
Based on this policy, MSMEs with lower CMR can expect loans starting at MCLR (marginal cost loan rate) of +0.05% with a one year ROI. Sengupta claims that, for Bank of Baroda, this strategy of offering CMR based pricing will aid in the bank managing risks better while also enabling further opportunities for crediting those MSMEs that are more deserving.
According to the latest edition of TransUnion CIBIL, the ‘SIDBI MSME Pulse report’ indicates that, as of March 2018, total commercial lending exposure in India stood at ₹ 54.2 lakh crores. Of this amount, SMEs and Microenterprise segments constitute about ₹12.6 lakh crores. This is a contribution of 23% when it comes to their outstanding commercial credit. Additionally, India’s MSME sector also saw a powerful increase of more than 16% year over year for FY17.
In fact, as per one analysis via TransUnion CIBIL, there are around 21 lakh MSMEs with a ‘good’ CMR rating of under 6 who automatically become eligible for this new interest rate policy. These 21 lakh MSMEs who have what is considered a deserving or good CIBIL MSME Rank constitute about 80% of the MSMEs of the country. Hence, Bank of Baroda wishes to drive access to finance such MSMEs as this helps to better control the quality of the portfolios being offered loans from their credit institutions and banks.
Even the CEO and Managing Director of TransUnion CIBIL -Mr. Satish Pillai- has spoken on this move by the bank. According to Pillai, by offering risk-based pricing for their MSME loans, Bank of Baroda has taken a very progressive approach. He and his team at CIBIL remain confident that this strategy is not only helpful when it comes to asset quality of portfolios managed, but also when it comes to managing risks associated with disbursing loans. Finally, he is certain that Bank of Baroda’s long term goal, with the help of this strategy, has been to improve credit penetration for those MSMEs in the country that remain more deserving.
Over time, this strategy could lead to the development of strong businesses and fuel the growth of MSMEs throughout the country. CMR based pricing in general aids in resolving can't information asymmetry, according to Pillai. Hence, it contributes towards allowing for more objective credit based decisions. This ensures both a faster and wider disbursal of funds towards MSMEs without the worry of risk that comes associated with loan repayment.
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