Unlocking value for small unorganized business: A Conversation with Shalinee Mimani, CRO at Godrej Capital

Godrej Capital, the financial arm of Godrej Group, provides loans to homebuyers and MSME owners with its innovative products and offerings. Godrej Capital also focuses on aiding MSMEs in their day-to-day operations and understands that compliance and regulatory guidelines can be a huge pain point for some MSMEs owners; in an attempt to bring out how MSMEs can ensure that they follow all necessary regulatory guidelines and how Godrej Capital as a lender provides loan assessment for its customer. CXOToday has engaged in an exclusive interview with Shalinee Mimani, Chief Risk Officer at Godrej Capital.

Q1. What role do macroeconomic factors such as inflation, interest rates, and GDP growth play in assessing credit risk in retail finance?

Macroeconomic factors such as inflation, interest rates, and GDP growth rates play a significant role in assessing the credit risk of retail customers. This is because they inherently impact & determine the ability of borrowers to repay their debts, which in turn affects the credit risk of the loan. For example, suppose the economy is experiencing a recession. In that case, unemployment rates are high, the likelihood of borrowers defaulting on their loans increases because borrowers may experience a loss of income, a decrease in the value of their assets, or a decline in the value of their investments, which can all impact their ability to make loan payments.

Delving deeper, here are some more nuances:

Inflation: High inflation can erode the value of money over time, stressing a borrower’s disposable income and thus making it more challenging to repay the debts, increasing the overall risk to a lender’s portfolio.

Interest rates: Higher interest rates can increase the cost of borrowing, and low-interest rates may lead to increased borrowing, which can also impact the credit risk

GDP growth: A strong GDP growth rate can indicate a lower credit risk, as it suggests a healthy economy with growing job opportunities and incomes. Conversely, a weak GDP growth rate may increase credit risk, as it means a sluggish economy with limited job opportunities and weaker consumer spending.

By assessing these risks, financial institutions take more informed lending decisions.

Q2. How can lenders like Godrej Capital use the insights gained from secondary risk analysis to develop customized lending solutions that meet the specific needs of small unorganized businesses?

Godrej Capital deploys an extensive risk management framework supported by technology. We are committed to make better lending decisions from an initial stage of fulfilling the customer’s loan requirement with appropriate  scorecard based models for risk profiling and income assessment models, to arriving at the right pricing for customers basis risk profile. This is done while considering the superior customer experience we intend to give the customers. After studying the market for potential size, we focus on the specific needs of businesses and customers with customized solutions. We lend to customers and understand their preferences by developing the ‘segment of one,’ where we can tailor prices and products to everyone. Our strategic approach has been to address the burgeoning credit supply gap through our innovative product suite. Under our Loan Against Program, we have introduced various SME-focused repayment offerings like ‘Design Your EMI’ and ‘LAP 25′ to address business owners’ challenges: business seasonality and uneven cash flows . We aim to launch more MSME-focused offerings and cash flow-based unsecured business loans in this financial year and help them grow together. We plan to serve the unorganized businesses by building credit assessment models as appropriate for this segment.

Q3. How substantial is compliance in retail finance, and how do MSMEs owners ensure they operate within regulatory guidelines?

The Retail Finance industry, like many regulated sectors, undergoes necessary regulations and must comply with various laws and regulations, including those related to data privacy, consumer protection, anti-money laundering, and fraud prevention besides the norms laid by RBI. Failure to comply with these regulations can result in significant penalties, fines, and legal action against the institution.

While managing to grow their businesses, it is also imperative for MSMEs to be on the right side of compliance by ensuring that they are registered with various government agencies such as the Goods and Services Tax (GST), the Ministry of Corporate Affairs (MCA), and Income Tax Department, etc. In addition, from time to time, MSMEs must keep up-to-date with the developments of specific regulations that apply to their industry or product category. Even though keeping up to date with compliances comes at a cost, MSMEs must keep a longish view of their business and treat this as an investment for risk mitigation and empanel experts as required.

Q4. What impact is digitization having on the lending industry, and what risks and opportunities does this present for companies like Godrej Capital?

In the lending Industry, digitization aids risk management by bringing in efficiencies in both lending and collections. Technologies like big data frameworks, Data lakes are making processing structured and unstructured data much more accessible, allowing organizations like Godrej Capital to innovate their product offerings and cater to a broader segment of customers by assessing and taking calculated risks. This also helps in customer segmentation and appropriate risk-based pricing, which works for a win-win situation for both customers and lenders alike.

Further, advanced technologies like  Artificial Intelligence (AI), Machine Learning (ML), Data Analytics, Blockchain, etc., allow lenders to assess credit worthiness or default risks well in advance, which empowers lenders to act intelligently and collect their dues efficiently without ruining the customer (borrower) experience.  Along with acquisition and portfolio monitoring, lending institutions are increasingly and proactively switching to digital debt collection techniques to augment their recovery rates. Godrej capital has been one of the pioneers in implementing e-sign loan agreements, zero touch disbursals, ENACH mandates to ensure end to end digital processing of loans while ensuring necessary safeguards.

Q5. How does Godrej Capital plan to continue diversifying its product offerings while maintaining strong risk management practices?

Godrej Capital plans to expand geographically and diversify its product offerings while maintaining strong risk management practices. In addition, we intend to expand our existing Loan Against Property portfolio to different customer segments, focusing on smaller ticket sizes, and more MSME-focused propositions, which can help grow the overall business of MSMEs

We have recently launched unsecured business loans in 11 cities and will soon grow to 30 cities. Here too, we are driven by our strong focus on innovation to allow for flexibility in the repayment for the business owners.

Further, we are expanding our capabilities to evaluate risks more efficiently by setting up data-driven credit models processing structured and unstructured data sources that enable us to assess borrowers’ creditworthiness and thus allowing us to cater to a diversified customer base.