Online Quiz

Directions (Q 36–45): Read Passage 2F carefully and answer the questions. Some questions refer to paragraphs by number (1–7).

For decades, a small business that wanted a bank loan in India faced a familiar question at the loan desk: what can you pledge? Land, a house, gold or fixed deposits – collateral – gave the bank something to fall back on if the borrower failed to repay. The approach was understandable. A loan officer could not easily judge the prospects of a tailoring unit in Tiruppur or a spare-parts shop in Ludhiana, but could value a plot of land. The result, however, was that credit flowed most easily to those who already owned assets, while many firms with sound businesses but no property were turned away or pushed towards moneylenders charging far higher rates.

In recent years another idea has gained ground: lending against cash flow rather than against property. The reasoning is simple. A business repays its loan out of the money it earns, not out of the land it owns. If a lender can see, month after month, how much money comes into and goes out of a firm, it can estimate how large a loan the firm can comfortably service. Digital payments have made this far more practical than it once was. When a shop receives much of its revenue electronically and files its tax returns online, it leaves a trail of records that a lender can read, with the owner's consent, in minutes rather than weeks.

The advantages are obvious. A young firm whose owner has no house to pledge can still prove that customers pay it regularly. The lender, for its part, gains a more current picture than a valuation of land done once at the start of a loan. If sales begin to fall, the change appears in the data quickly, and the lender can talk to the borrower before a small problem becomes a default.

Yet the shift is less straightforward than its supporters sometimes claim. First, data describe the past, and the past is not always a reliable guide. A firm whose sales grew steadily for three years can be hit by a sudden change in demand, a new competitor or the loss of one large buyer. Collateral, whatever its faults, does not vanish when a market turns. Second, many of the smallest enterprises still deal largely in cash. A vegetable vendor or a roadside repair shop may run a perfectly healthy business while leaving almost no digital trail. A lending system that relies only on data may therefore repeat the old exclusion in a new form, favouring the digitally visible over the digitally invisible.

Third, there is the question of who controls the information. Records of a firm's transactions reveal a great deal – its customers, its suppliers, its margins. Owners are entitled to know what is collected, why, and for how long it will be kept, and to say no. Lenders that treat consent as a box to be ticked rather than a choice to be respected risk losing the trust on which the whole arrangement depends.

None of this means that cash-flow lending is a passing fashion. The most sensible approach seems to be a combination of the two: using transaction data to judge how much a firm can repay, while still asking for some security on larger loans and keeping trained officers involved in decisions that data alone cannot settle. For the many firms that sit between the two worlds – partly digital, partly cash – such a blended approach may be the difference between a fair loan and no loan at all.

The deeper change is one of attitude. A bank that asks 'what do you own?' is looking backwards at wealth already built. A bank that also asks 'how does your business earn?' is looking forward, at wealth still to be created. A good credit system needs both questions, asked with care and answered with consent.