TL;DR: Very effective. This is especially true in the aftermath of COVID-19.
BCG’s Digital Lending report states that online lending in India will be worth upwards of $1 trillion by 2023. The estimate is evidence that fintech solutions like loan management systems are abundantly useful. It is the benefits they bring to lenders that make them so potent.
What is a loan management system?
An online loan management system automates the complete loan lifecycle. Lenders can rely on it for either the entire process or just parts of it.
From processing information on a new customer to collection management, the system delivers help at every stage. Although they are most commonly known for loan document generation, a loan management system can do so much more.
Besides making the lending process frictionless for both parties, the system reduces the risk of default, eliminates human error and helps in loan restructuring.
But most importantly, they cater to the modern customer – a generation that demands every service and product to be online.
Reasons online loan management systems work for everyone
Peel all the layers and elements that burden the origination process. Remove all the formalities that are part of a typical lending lifecycle and look at just the brass tacks – the lender and borrower.
When you put the two under the microscope, a common factor emerges. A factor that can often be the difference between success and failure – uncertainty.
It is the emotion that underpins the entire lending process. The lender doubts the capability of the customer to repay the loan. The borrower doubts the veracity of the process.
Any tool or method that removes this element of uncertainty (or at the least reduces it) makes it more effective. That’s what loan management systems do. They lessen doubt and ambiguity.
Take, for example, the documents. Typically, lenders are at the mercy of hard copies which entails uncertainty. Were the correct loan documents created? Were all the papers submitted? Are there more documents that must be analysed?
Digitising the process eliminates these doubts. A loan management system would have templates of all required documents for any type of loan. Automatic document generation ensures that there are no missing links.
The efficacy of automated lending systems is not limited to making the process doubt-free. Time is another factor. The technology has reduced the time (and effort) it takes to process loans. It is a significant component in the rising use of loan management systems.
Lenders don’t have to wait for weeks to get credit reports. The system generates automated reports for all credit bureaus in minutes. This is just one example. The software reduces the time to disburse a loan in multiple ways. So, where a traditional method would take months, it takes just a day when an online system is in place.
Lenders depend upon multiple sources of data to determine if a customer would be a credible borrower or not. From bank account statements to credit card records, every financial document is pored over. Manually it takes hours and hours and is prone to error because the analysis is not easy.
Online loan management systems come with data analytics software and algorithms. So, not only all the documents are accessed online. They are also automatically analysed.
It simplifies the process of determining creditworthiness. Further, the software employs more data checks than a manual process, which reduces the risk of potential defaulters.
Another reason why these systems are effective is they can suggest which loan might be more suitable for a customer. During loan origination, the system scrutinises the application and provides insight into the most fitting loan. It does so in minutes and with precision. The same would take days when done manually and have less accuracy.
3. Robust recovery:
Digital lending comes with a risk because of the absence of collateral. Amplifying the risk is the lack of a system for ground collection for loan recovery.
What makes loan management systems particularly effective is features like NPA management and collections management. Such tools continuously monitor a borrower.
Couple it with predictive analytics, and the lender can quickly pinpoint which borrow might default. It also allows the lender to respond to change in a borrower’s circumstance swiftly. It’s solutions like this that address the risk of recovery and collections, making the software more useful.
4. ROI visualised:
An end-to-end loan management system integrates with the accounting software. This allows lenders to browse through balance sheets and P&L. Using the analytics tool of the system, lenders can dive deeper into their revenue streams. Identifying areas that need to be improved and where they should invest more becomes straightforward with the automated lending system, making it more effective.
5. Extraneous factors:
A sound loan management system is the most effective tool banks, lenders, or NBFCs can have in this current era. The efficacy of these systems mostly springs from their inherent features. That said, external factors, notably the pandemic, play a role in it too.
The necessity of physical distancing has changed consumer behaviour. They want everything available to them on a digital platform, and getting a loan is no different.
What used to be a mix of physical and digital origination pre-COVID will need to be completely virtual now. An online loan management system enables this.
The bottom line:
Remove the chaff from the grain, and it comes down to this. An online loan management system automates workflow. It streamlines the entire loan process from start to end, making the lives of employees easier.
That is why these software are so incredibly effective, and there are stats that give irrefutable proof of the same.
50% of loan seekers who can access the internet purchased a loan online, according to the Digital Lending Report by Boston Consulting Group. This number is set to grow in the coming years.