This post was originally published on The Economic Times
To countless Indian micro, small, and medium enterprises (MSMEs), secured lending is a burden which often hides the price a borrower pays for lacking credit history. Securing credit for such MSMEs is painfully fraught with exchanging collateral for a loan—gold, loans against securities, property, and basically anything that assures the lender of repayment.
And those with feeble credit history are often sidelined and often find recourse with unsecured loans at higher than usual interest rates. In most cases, since the lender assumes a more manageable credit exposure, the asymmetry, despite being uncomfortable, is how credit has been extended.
Building a credit history
The mechanics of building credit are straightforward: only secured loans build credit history—quite an irony that an MSME wanting a loan needs credit data that could be built only if he or she had a loan.
Every equated monthly instalment (EMI) paid on time is reported to credit bureaus like CRIF High Mark, CIBIL, and Experian. Over 12 to 24 months of consistent repayments, a borrower who started with no formal credit record begins
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