This write-up about the revival of the lending business in India and globally takes on a conversational format – a short discussion with Mr. Koushik Sekar, a think-tank in the Fintech space.
COVID-19, although a global health crisis, unleashed an even worse economic crisis that disrupted almost all industries across the world. Lockdowns that were mandated to curb the spread of the virus pulled economic activity drastically down, leading to layoffs, salary cuts, furloughs and heavy drops in consumer spending and saving. With the Indian economy touted to contract 10.8% this year, consumers are still struggling to control their finances and cutting back on discretionary spending.
From expounding the nitty-gritties of how COVID-19 has affected the lending industry to exploring how best the players in the industry can bounce back through digitalization, he touches upon crucial aspects of lending and technology that many could consider food for thought.
It goes without saying that the pandemic has direly affected the banks and non-banking financial companies (NBFCs). These players are rushing to adopt digitalization in their processes. How do you think these enterprises are embracing this ‘New Normal’?
Digitalization in banks has grown exponentially in the past couple of months. You won’t believe it, but we at BankBazaar have been trying to urge banks to adopt digitalization in their everyday processes and procedures for some time now. Solutions like paperless and contactless loan organization and disbursal methods are increasingly becoming the norm in digital lending. But we always had some resistance from banks – as they weren’t fully comfortable in taking everything digital (like meeting customers before they sanction loans).
COVID-19 has made us move that bill – now customers are afraid of bank reps knocking at their doors due to the contagiousness of the virus. Banks have taken on V-KYC solutions – through which bank reps do a video-KYC call with the customer, mark their address location, verify that their Aadhar card is linked to that address and complete the KYC process. The digitalization that would’ve taken at least 1.5 – 2 years if not for COVID-19 has been done in a span of just 6 months now.
What changes can we expect banks and NBFCs to make to their lending processes (including LOS) post-COVID – innovation and implementation-wise?
I have to say that NBFCs were always a step ahead in adopting digitalization and newer technologies to improve their business, lower operational costs and target a much wider client base than banks. Since they were more open to adopt advanced loan origination systems, NBFCs found it easier to target the younger, riskier and tech-savvy generation of customers – those who spend not just on a need-basis, but also a want-basis (eg. on electronics, travel, weddings).
Due to COVID-19, many industries took a big nosedive into negative, like the travel and hospitality sectors. During this time, the RBI instructed banks and NBFCs to treat all customers the same in case they opt for a moratorium, but these lenders built models to understand the segment of customers whose bad debts would be lower post-COVID. Now banks and NBFCs are attempting to build these exceptions and deviations into their LOS models through relevant APIs.
We can also expect these companies to build crisis-time lending models that could help them tide through recessions and market shocks. Say for instance, NBFC A finds that Customer Profile X did well to achieve a good credit rating with the bureau during the 2008 and 2019 crises. Now NBFC A would use activity mapping, a feature found in popular LOS softwares like CloudBankIN and data analytics to pile this data into a model and use it to prioritize lending to Profile X or Sector Y the next time a crisis comes.
What do you forecast can be the advantages of such changes?
Multiple advantages, definitely. Let me list some of them here:
- By bringing Video KYC and Aadhar identification into the loan origination fold, banks and NBFCs can better their new customer acquisition process and reduce their turnaround time to issue loans.
- An open-API digital ecosystem that lenders are sure to implement post-COVID can help them access internal and external customer information to digitize and quicken the loan application, verification and disbursal process.
- Social distancing will surely continue for some years, and in this light, virtual customer servicing through chatbots and voicebots can help lenders immensely. Advanced chatbots can provide loan application guidance and respond automatically to inquiries. Results – a user-friendly loan origination process and reduced service costs.
Can you talk a little bit about the impact of digital LOS on Banks vs. NBFCs in the post-COVID era?
Both banks and NBFCs are now in a position where they must adopt/upgrade their loan origination systems and software to become more relevant and profitable. Older softwares that some banks use have workflows that are not very strong and customizable. Some have limited end-to-end traceability for documents, reports and exceptions. On-premises LOS solutions are also more challenging to maintain. Newer, more advanced LOS softwares have scalable architecture that big banks need to improve their operations and save costs.
On the flipside of the coin, NBFCs are quite ahead of banks in going digital; and I don’t see this stopping post-COVID. In a late-2019 survey of 350 banks, only 17% of them successfully digitally transformed to scale, whereas most NBFCs have some digital footprint or another in their processes. The central KYC registry can be accessed by all banks and NBFCs but the difference in integration to external APIs would put NBFCs ahead of banks.
Koushik, what do you feel about partnerships between banks and NBFCs on the loan origination front to help speedy recovery of lending?
If you look at all the big banks, they have a pretty solid presence in all the major cities and towns across the country. But NBFCs, although growing briskly these days due to digitalization, don’t have such a wide outreach. This is where I think a co-lending partnership between banks and NBFCs can be mutually beneficial for the recovery of the lending sector, although I am yet to see this model kick-off in full swing. But let me tell you, banks and NBFCs do partner with loan aggregators like BankBazaar to provide them with an online marketplace to showcase their products and also seek help in the loan documentation processes.
The RBI’s guidelines of co-lending launched in 2018, by which NBFCs would take 20% of the credit risk and the rest would be covered by banks are well-founded. I feel 3 aspects would be noteworthy for the success of such a model:
- Seamless technology integration between banks and NBFCs.
- Procedures to be put in place to ensure smooth loan origination and disbursal, while understanding each party’s roles and responsibilities in the customer lifecycle.
- Banks and NBFCs must aim to reach a bigger customer base like in tier-2 and tier-3 towns and bring them into mainstream lending.
Please give your thoughts about Contactless and Less-Contact customer credit valuation.
These solutions actually remind of when Amazon and Flipkart came in and people reduced/stopped going to retail stores to buy goods! As I had mentioned earlier, Video KYC solutions-based digital onboarding is here to stay and will undeniably beef up new customer acquisition. Contactless loans and credit cards can be swiftly and efficiently approved using AI-powered technologies like voice and facial recognition coupled with centralized CRM solutions that can be built into LOS softwares. I recently heard that a bank in Russia is piloting a facial recognition payment software that would cut transaction times by 75%.
I feel the number of ‘completely presence-less’ loan and credit card disbursals will be lower starting out in this journey (which could be attributed to the state of the economy), but it’s safe to say that contactless loan origination processes through digitalization will be the future of banking.
Do you think banks and other big players can super-customize credit product offerings – through technologies like geospatial analytics, remote-sensing solutions, etc.?
See, a credit-worthy customer who has been borrowing and paying off his loans will always find it easy to avail financial products. Where I see technologies like geospatial analysis coming handy is for untapped areas of the economy like agriculture, MSMEs in rural and semi-urban areas etc. and fishing, whose customers might not have much of a credit history Banks and NBFCs would use such technologies and information collected from data aggregators to build an alternate data model into their LOS, which would make their origination and disbursement process easy, reliable and risk-mitigated.
You mentioned alternate data models. What do you mean by that and do you think integrating them into LOS would be critical?
100%. COVID-19 has increased business uncertainty for lenders and traditional data sources mightn’t be sufficient for a thorough risk assessment of MSME and retail customers. But alternate data like cash flow, search engine data, SMS data, psychometric analysis and social media data are golden information that banks and NBFCs can use to determine customer’s creditworthiness. This data is the foundation for predictive analysis – which lenders can use to differentiate between a good and bad credit.
Many lenders these days are reliant solely on credit bureau information for building credit models into their LOS systems. I would say it would be quite a challenge to integrate alternate data into these systems, but if lenders can achieve this, their revenues will go through the roof! The credit card penetration in India is only 5% (including the under-18 and over-70 population), but this can be improved greatly if alternate data models can be used extensively.
Finally Koushik, give us your opinion about the digital roadmap of bank and NBFC lending post-COVID in India & globally.
Let me keep this short – banks and NBFCs are now reeling under the pressure of COVID, but this has only pushed them to embrace digitalization tighter than ever. Rising popularity of digital onboarding solutions, extensive usage of Central KYC information, using AI-based techniques to assess creditworthiness and build early warning systems (EWS), lending using alternate data and the move of LOS solutions into a cloud-based architecture – these I feel would be the key pinpoints in banks and NBFC’s digital roadmap.
To conclude, there is a lot of learning for the lending industry due to COVID-19: at every digital turn from now on, lenders can expect to gain plenty of traction for their customer outreach, loan origination and loan management. Some banks and NBFCs might take time, but one fact is undeniable – digital transformation is round the corner and they cannot escape it, they can only embrace it.