Lending as an economic activity has come a long way from the days of pawnbrokers to credit cards and, most recently, digital loans. The advent of agile technologies, novel delivery platforms, innovative business models, and competitive players is accelerating the digital revolution in the lending sector. The digital evolution of lending has now reached the point where the entire lending process is automated and streamlined using Loan Management Software (LMS). It streamlines loan processing and allows lenders to manage their portfolios easily. Borrowers also benefit because it gives them more control over their personal and financial data.
With its wide-ranging capabilities, loan management software have assisted lenders in efficiently managing recovery and lower defaults while delivering new competencies.
This article explores how loan management software can help you lower default rates in your lending portfolio.
Critical Issues in Loan Life Cycle Management: Delinquency, Defaults, and NPAs
The primary factor determining the lending firm’s profitability is the quality of assets in its portfolio. Therefore, they must prudently and actively manage the life cycles of loans to ensure and sustain asset quality.
Credit delinquency
For a credit product, its health correlates with repayments as per its amortisation schedule. Defaults and delinquencies represent missed repayments of equated monthly instalments (EMIs) but vary in severity.
If the required payment is not made on time or even slightly past the due date, the loan is said to be delinquent. It will be regularised with the payment of instalments plus applicable interest and fees.
Default Stage
A loan enters in default stage if it continues to be delinquent for an extended period. This has dire consequences for the lender and the borrower, affecting their relationship.
It impacts the borrower’s credit score limiting his/her ability to avail further credit.
RBI’s Direction on NPAs
This poses a grave issue for lenders as well. The Reserve Bank of India(RBI) has stipulated that loans past their dues for more than 90 days must be classified as non-performing assets (NPA) and handled as per prevalent regulations.
An NPA is a double-edged sword for the financial institution as it:
- No longer generates revenue and
- Becomes a loss-making liability because of the provisioning requirement as per Income Recognition and Asset Classification (IRAC) norms.
Impact of High NPA Levels
High NPA levels impede a financial institution’s ability to lend due to declining revenues and regulatory constraints imposed on lending activities due to such bad loans.
All these variables make loan defaults a ticking time bomb that could blow into a calamity. The need for loan management software becomes apparent in this situation.
Lowering Default Rates: Role of Loan Management Software
Loan management systems employ cutting-edge technologies such as Artificial Intelligence (AI) and Machine Learning (ML) to manage loan recovery efficiently.
Compared to manual credit management practices or legacy software, the features of such software serve as superior tools for banks and FIs in handling loan defaults.
To prevent repayment defaults, loan management software performs three types of functions:
1. Preventive functions
Preventive measures begin with the loan application process. One of the primary goals of credit appraisal is to determine the applicant’s eligibility and repayment capacity for the proposed credit facility.
Another goal is to weed out habitual and potentially wilful defaulters and fraudulent applicants.
To establish applicants’ creditworthiness, manual and legacy systems rely on credit reports from credit information firms. However, these credit reports are often outdated, or the data cannot accurately calculate repayment ability.
For credit appraisal and underwriting, loan management software employs Robotic Process Automation (RPA) and machine learning (ML).
These tools verify the applicant’s identity, pull information from numerous credit reports, analyse real-time transaction data for assessment, and even leverage data from the applicant’s social networks to get an accurate credit score for processing the application.
2. Predictive function
Continuous monitoring aids in detecting early warning indicators and enhances risk management activities.
However, it is an area that is frequently overlooked during the loan’s life cycle. Competition necessitates business expansion, therefore, the emphasis shifts to maximum credit disbursement.
Also, a point to note is that a borrower’s credit profile could deteriorate during the loan. His financial health will affect the loan repayment. Therefore, it is necessary to monitor the loan to protect the lender’s assets constantly.
The Role of MIS
Through comprehensive Management Information Systems (MIS), loan management software aids in quickly and easily identifying these warning signs. These MISs regularly create extensive reports on potential NPA, special watch accounts, etc., to help businesses monitor these loans better.
A smart system will also notify lenders when regulatory requirements like stock statements or acknowledgement of debt (AOD) are due from the borrower, without which the loan may slip into NPA even with proper repayments.
It would also send automatic notifications to loanees when repayments are due, informing them of upcoming payments.
3. Proactive function
Loan recovery and delinquency management is a major aspect of lending that demands considerable effort over extended periods.
Rigorous due diligence, real-time credit appraisal, active monitoring, and dynamic action reduce loan default rates in a lending institution’s portfolio.
Final Note
Loan management software can help with automated decision-making, early warning systems that use predictive analytics, identifying problematic loans, developing collection plans, allocating resources for recovery action, and other tasks.
Moreover, they provide preemptive and remedial solutions to help reduce loan defaults.
Finezza offers a comprehensive and agile Loan Management System that supports multiple loan types. We also provide an advanced and customer-centric Collection Delinquency Management Suite for streamlining your debt collection activities.
Finezza makes it easier to recall loans or restructure credit in a mutually convenient way for the lender and the borrower.
Contact us here to know more.
Leave a Reply