Role of Cash Flow Score & Financial Health Report in Loan Decisioning

In the lending industry, understanding a borrower’s financial health report is paramount. Traditional credit scores have been playing a major role in lending decisions, but they offer only a partial picture of the borrower’s information. At present, lenders are equipped with cash flow score and comprehensive financial health reports, which provide a more holistic view of a borrower’s financial standing. 

What is a cash flow score and what are its benefits?

A cash flow score is a numerical measure of a borrower’s ability to generate and manage cash flow. It is not about looking only at the income and expenses but also assessing the timing and consistency of the cash flows. This offers lenders an opportunity to look into the borrower’s

Repayment Capacity:

With cash flow scores, lenders can accurately predict a loan applicant’s ability to meet loan obligations on time.

Financial Stability:

We can understand the applicant’s financial situation and stability, which can help us understand the risk of default.

Risk Assessment:

With this score, we can potentially identify red flags such as irregular income or high debt service coverage ratios.

When lenders incorporate the cash flow scores into their lending decisions, they can make a more informed assessment of the applicant’s creditworthiness. This helps reduce default rates and improve portfolio performance.

How financial health reports help lenders: 

A financial health report will provide a detailed snapshot of a borrower’s overall financial well-being. It has various factors beyond the cash flow scores, such as 

Debt-to-income ratio:

This ratio can help lenders measure the borrower’s ability to pay their existing debt obligations.

Credit History:

The payment history is an essential part of understanding the financial health of the applicant.

Income and employment stability:

A regular income and job security are key indicators of financial strength.

Assets and liabilities profile:

Understanding an applicant’s assets and liabilities helps assess their financial position.

With this score and the report, lenders can actually perform an accurate and predictive risk assessment. This will enable them to:

Expanding credit access: the role of alternative data

One of the most significant abilities of these cash flow scores and financial health reports is their ability to expand credit access to the underserved population. Traditionally, the population that does not have pay slips or businesses like freelancers, gig workers, and daily wage earners faces challenges in obtaining loans due to their lack of creditworthiness indications such as steady paystubs.

By analyzing bank statements and other alternative data sources, lenders can now assess the financial health of these individuals and make informed lending decisions. Cash flow scores in particular provide valuable insights into the income patterns of self-employed individuals, helping lenders determine their repayment capacity.

Leveraging technology for inclusive lending:

Using advanced analytics data is making alternative data-driven lending a possibility. For individuals who have a very limited credit history, advanced analytics solutions can analyze their data and create comprehensive financial profiles and cash flow scores. 

By utilizing these technological advancements, lenders can take part in financial inclusivity by providing credit opportunities to a larger segment of the population.

How can Hotfoot’s Naadi.ai help lending institutions?

Naadi.ai is a versatile lending solution that facilitates risk-based credit decisioning and accurate pricing. It is tailored for all financial institutions, including banks, NBFCs, and e-commerce platforms. Naadi also provides portfolio growth opportunities by unlocking new segments in MSME and customer lending.

Naadi transforms the financial underwriting for informed decision-making by providing:

1. Financial Health Reports:

A summary of income sources, assets, expenses, debts, investments, and more, providing a clear snapshot of the applicant’s financial state.

2. Cash Flow Scores:

Generates a numerical value, a risk score based on the applicant’s cash flow. A higher score correlates to a lower default probability.

3. Predictive Analytics:

Predicts the probability of write-off within the first 12 months. 

Naadi.ai is a single-stop solution that a lender will require for risk-based credit decisioning.

In conclusion, cash flow scores and financial health reports are important to make informed, data-driven decisions. By utilizing the power of these and leveraging alternative data sources, lenders can build stronger relationships with borrowers, reduce risk, and drive sustainable growth while promoting financial inclusion.