Lending is the engine that powers the financial growth of all businesses and individuals all over the globe. As the global economies get interconnected and interdependent more every day, the need for funding has also increased enormously.
The number of retail borrowers, SMEs, and business borrowers has surged multifold in the last decade. Though this upward spiral has translated to more income and profit for most financial institutions, not all is green.
In recent times, there is an increasing number of loan defaults, and this has already started taking a plunge at the bottom line of some of the financial institutions.
Depending on the amount involved in the default, the impact multiplies. What can the financial institutions do to curb loan defaults? Well, the answer lies in digitisation.
Key Impacts of Digitisation in Lending on Curbing Loan Defaults
Digitisation of the loan management systems can help curb loan defaults at different stages of the loan cycle. Though most of the lending institutions are in some stage of the digitisation journey, it becomes imperative to expedite the journey to leverage digitisation’s maximum power.
The top 6 strategies that a financial institution can adopt to curb loan defaults are as below:
1. Digital Customer Screening
A good start is half done! Since the customers’ profiles have become more complex nowadays, financial institutions should have robust digital software that can handle the customer screening the best. Depending on the financial organisation’s size and need, they can either go for fully homegrown software or go for off the shelf, SaaS-based onboarding software.
Whatever option the financial institution may choose, the software should have capabilities to do thorough Know Your Customer viz. KYC, document screening to check if there is any forgery, AML check, blacklist check against nationwide and work wide databases.
2. Integrate with Credit Scoring Agencies through Realtime APIs
Financial Institutions should make sure their lending system is integrated with credit score agencies like CIBIL to make informed decisions before approving loans. Since credit rating agencies like CIBIL have a tie-up with most banks and financial institutions worldwide, a higher credit score can be used as an indicator of the customers’ past repayment behaviour.
Since the credit market is very competitive, sometimes the lending institute skips this important step and repent later. Sometimes the lending systems refer to old records to check credit scores, but this is also not effective. It becomes essential for the digital lending platform to check credit score in realtime to check against the latest data. This should be set as a mandatory gatekeeping step in the loan approval process.
3. Use Technology to do a Thorough Background Check for Business Loans
The loan amount involved in SME and corporate lending is very high compared to individual lending. Hence the bank should have a highly sophisticated digital platform to onboard business customers. The standard, blacklist check, and credit score checks may not be sufficient.
The software should have advanced capabilities to check the business’s creditworthiness ness by doing a detailed study on their past balance sheets. Such a detailed study to get into the nitty grittier can be done more efficiently by software than humans. The digital software should have capabilities to screen through the Key Result Areas or the businesses’ KRAs for the past several years. This should include screening their revenue, assets registries, liabilities, EBITDA, GST filing, etc., for the past several years.
Post-screening all the KRAs, the software should generate a customer risk score, which will act as a guide for the lending institution to decide on the customers’ creditworthiness.
4. Make Repayment Methods Hassle-Free
For recurring EMIs like home loans, personal loans at the time of issuance itself, set up recurring auto-payments on a defined day of the payment cycle. This will reduce the chances of customers forgetting to make EMIs and will naturally curb defaults.
For other types of loans like mortgage loans, gold loans, vehicle loans, etc., the loan repayment is flexible, and most financial institutions do not mandate a fixed EMI. For such loans, where the customers have flexibility in payment, financial institutions should provide enough digital channels like online banking, mobile banking apps, payment apps, etc., to make the payment remotely.
This will save a lot of time for the customers. For the financial institutions, the more they encourage digital repayments, the financial institutions can optimise the workforce that handles repayment processing at the branches.
5. Timely Reminders Through All Channels
The lending software must have the capabilities to send advance reminders to the customers to maintain sufficient balance on the due date. The reminders can be sent through multiple channels like emails, messages, automated calls, etc., and the customers can plan for the upcoming due accordingly. Reminders can also provide repayment links to enable customers to make repayments easily.
6. Embrace Artificial Intelligence Through the Cycle
AI technologies like machine learning and deep learning can be implemented at different stages of the lending cycle. This could include risk rating, setting personalised interest rates, understanding the customers’ repayment trends, creating custom recovery methods for each borrower, etc.
AI technologies could also be used to set custom reminders, flexible EMI, flexible EMI tenors, etc, depending on the nature and amount of the loan. This way, some of the complex tasks are automated, and the results are predictable. This will help enormously in reducing the loan defaults.
To sum up, with the number of retail and business borrowers increasing in big numbers across all the sectors across the globe, complete digitisation of the lending platforms is the way ahead for the lending institutions to make the repayment easy for the customers and curb loan defaults.
Using AI technologies to do more screening of the customer behaviours will only aid the financial institutes to make their revenue stream from loans more predictable. This also allows financial institutions to deploy their human potential in better revenue-generating areas.
Contact Finezza to know how you can improve your loan default rates with a comprehensive loan management system.