Digital loan creation: transforming credit underwriting
The loan market is experiencing a paradigm shift towards digitalization across the world. A new category of digital lenders has emerged, using modern technologies to make consumers’ daily lives easy and frictionless. According to a BCG report released in 2020, more than $ 1 trillion in retail loans will be disbursed digitally in the next 5 years, and the digital footprint of consumers will grow to 75% from 50% by 2023 in India.
Changing credit landscape
In India, the lending landscape has changed dramatically over the past decade. To keep up with changing consumer demand, the industry has transformed its entire lending process, which includes a faster, more stable and streamlined borrowing experience for customers. The main factors that have led to the stimulation of the growth of digital lenders are: the increase in the number of tech-savvy users, increased digital connectivity and increased innovation. According to TransUnion CIBIL Market insights, Indian fintech players paid more than double the amount to millennials and Gen Z consumers under 30, compared to traditional banks, in 2020. Fintechs have digitized many processes, but above all, they have changed the face of underwriting.
Transform credit underwriting with technology
Traditionally, for lenders, underwriting a consumer has been a long, lengthy, and complicated process, as it involved manual underwriting and paperwork. As digital lenders are armed with automation / technology, this process has also undergone a transformation. With the shift from manual to digital loan origination, the loan system has become faster, smarter and more convenient not only for lenders but also for borrowers. Let’s find out how digital procurement has reorganized underwriting –
Reduction of the TAT (Turnaround Time) – In today’s age, having a fast and efficient personal loan process is very important for consumers. Traditionally, lenders had to undertake grueling manual verification processes in which they typically took several business days to complete the same thing. Since fintech companies are equipped with innovative technologies, the entire verification process can be done digitally through eKYC, Video KYC, eSigning, etc., reducing the processing time by almost 10 times.
Precision in decision making Traditionally, the credit score was considered the benchmark to guarantee or assess an individual’s creditworthiness. But Fintechs work differently, they usually base the decision on internal proprietary algorithms to assess a candidate. These algorithms help to collectively assess several parameters of his credit profile such as FOIR, CIBIL score, loans taken, etc. Social score algorithms are used by credit managers to further enhance the accuracy of their decision. The use of technology helps them better understand lifestyle, spending behavior, job stability, etc. of the candidate. Therefore, decision making is not only faster, but smarter.
Improve scalability: Conventional bankers performed physical verification processes before lending. With processes now equipped with robust technology, lenders can now verify consumer profiles regardless of geographic location using tools such as geolocation, eKYC and other online verification processes, helping them to unlock the untapped credit market and ladder.
Increased inclusion: As with conventional lenders, credit was only extended to those with a good credit rating. But what if a borrower is applying for a loan for the first time and does not have a sufficient grade? Traditional lenders used to turn down their requests. However, digital lenders take into account not only credit rating but various other factors like job stability, income stability etc. So, with the entry of digital lenders, new borrowers enjoy easy access to credit when they need it most.
Digital procurement, data-driven processes and the proper use of technology have helped reduce human intervention, making processes more accountable. Digital lenders have not only helped remove limitations from the underwriting process, but have also added new dimensions to meet the primary goal of providing access to credit to those who need it. With such rapid advances in lending, digital lenders are sure to change the face of credit in the years to come.