Paperless Lending – Is It Achievable? 

Ramaswamy Venkatachalam
Ramaswamy Venkatachalam, Managing Director – India, FIS

Challenging economic times dictate that banks need to seek radical ways to transform their operations. This is particularly true in lending operations, where opportunities exist to remove wasteful and redundant paper processing to improve customer service and reduce cost.

Banking customers in India are presented with myriad options for sources of credit. This is seen across the spectrum in metros, urban and rural areas across retail, small and mid-sized enterprises (SMEs) and corporates as well. The need for credit spans diverse requirements from consumer products (customer wants instant credit decisions), whereas SMEs and corporates would want their bank to understand their business and provide credit as and when needed. Collaterals for credit in various forms add to the complexity of the credit business case for banks. This article focuses on the organised sector that is governed by due diligent corporate governance norms and applicable prudential norms.

According to some findings, customers of cooperative societies and primary agricultural credit societies find these organisations to be relatively more approachable than commercial banks. A better understanding of the customer needs, owing to the proximity of cooperative societies and PACS, coupled with their ability to service these needs, tends to build this affinity.

Customer expectations, whether retail, SME or corporate, around the loan application process, loan servicing, limits and collateral management are also increasing. To start with, the customer would like to get serviced at the time and place of their choice and with a differentiated set of products and services. Superior customer experience across the loan life cycle is key to attracting and retaining customers. On the other hand, prudential norms from regulatory authorities on income recognition, asset classification and provisioning pertaining to advances continue to evolve and banks need to be agile to adequately respond to these growing needs.

Given the diverse needs of varied customer segments and an unmet demand for credit facilities, cooperative banks are in a unique position to fulfill these needs while ensuring that the risk and compliance requirements are met to the satisfaction of the respective boards and the regulatory authorities.

Effective Loan Life Cycle Management

Today, most customers request for a loan in a bank branch by providing KYC/e-KYC and other documents in support of the loan application. While this mode ensures compliance with the bank’s norms, it is somewhat restrictive in today’s world, where the customer is more informed about credit processes and more importantly, the competition. For example, the customer expects origination and servicing via alternate delivery channels like the internet and mobile or fees/charges that are based on the banking relationship. The current generation of youth and new-age businessmen are quite tech-savvy and credit servicing on the mobile would be a key differentiator for any bank.

Business Development: Solutions and strategies that drive lending leads and customer interaction in an omni-channel model that covers the branch, internet, mobile, agent and call center.

Credit Application: Channels and methods that allow acceptance of applications and associated collateral for processing and provide status updates to applicant.

Credit Review: Tools that allow banks to establish criteria that allow evaluation of an application against credit policy. This should provide auto approval or denial plus manual review with conditions for underwriters, legal teams and appraisers. Subscriptions to leading credit bureaus and government established registries for e-KYC, CKYC and their integration with the bank’s systems are commoditised today. Banks that can leverage non-traditional sources for credit information on their borrowers and guarantors would be at a significant advantage.

Fulfillment: Validation of state and central compliance, production of compliant documents, lien marking, e-signing, and seamless movement of the loan to servicing would be achieved in this stage. Banks can gain competitive advantage by guiding the customer through the origination process till fulfillment by deploying technology. On one hand, technology can be leveraged to increase operational efficiencies in the bank, and on the other, it can enhance the customer experience.

Servicing: Capabilities to service loans throughout their lifetime, including core processing, fees and charges, accounting, delinquency management and ongoing payment/advance management. Seamless connectivity into the national payments networks like IDRBT for RTGS/NEFT, NACH and Cheque Clearing or connectivity with sponsor banks would add value.

Portfolio Management: Services that allow the cooperative bank to review the loan portfolio for regulatory compliance, examination expectations, loan and borrower health, audit, exception management, limits/collateral management and aggregate metrics would be an integral part of the technology setup. This includes managing and reporting net interest margins, net interest income, etc.

Banks seeking a larger share of the credit market can position themselves in an advantageous position by offering tailored processes for different customer segments and credit products, from loan application till servicing, by enabling decision-making with due controls as per the credit policies of the bank. From a technology perspective, banks need to actively consider mobility loan solutions that seamlessly integrate with a loan origination system and loan management systems.

Setting the Pace with Technology

Reduced total cost of ownership (TCO) and increased efficiencies: Industry analyst firm Financial Insights estimates that core banking consumes more than 12 percent of a bank’s total IT budget, with more than half of that amount spent maintaining aging systems and all the points of connectivity across the organisation. Automating processes provides ample scope for cost and operational efficiencies.

Improved time to market and enhanced competitive innovation: Overcoming technical obstacles to business innovation is paramount for competitive advantage in the banking industry. A nimble technology setup that can be quickly tailored to the bank’s needs would be beneficial to the bank.

Decreased risks and costs to support real-time payment systems: In processing these transactions, banks are continually confronted with potential risks and errors due to inconsistent exception processing. A robust credit process orchestration platform can help alleviate these risks and reduce costs.

Consistent, real-time customer experience across multiple delivery channels: Technology needs to be an enabler for the bank through omni-channel services that offer new and improved ways to design and address business requirements that leverage IT investments in the long run.

Business agility and competitive advantage: Business processes in loan origination and management need to be dynamic to adapt to changing demands of new products and services. Technology components need a highly granular design that enables cooperative banks to interactively assemble new products and services without the need for application development.

Growth without business interruption: Cooperative banks require technology options that reduces operational risk and creates an always-on solution for you and your customers. More importantly, the technology investments need to align with the business growth.

Lending Technology with New Business Processes

A tremendous opportunity exists for cooperative banks to take advantage of mobility, loan origination, document imaging and workflow technology. By enabling electronic capture at the initial entry into their institution, banks can begin to realise the vision of an entirely paper-free lending operation. This vision enables the elimination of redundant workflows, the reduction of paper/courier costs and reduction of errors created from manual processes. The banking industry, as a whole, has made great progress imaging specific documents and pieces of paper. The goal now becomes to automate the entire lending process from beginning to end.

(Views expressed in this article are a personal opinion of Ramaswamy Venkatachalam, Managing Director – India, FIS.)

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