Industry
Banking
Banking on purpose-led ecosystems
Solution
TCS BaNCS™
TCS BaNCS™: Enabling Transformation in Banks and Financial Institutions
Highlights
- Commercial loans assessment has always been long drawn. High ticket loans require detailed assessments, multiple validations for authenticity, accuracy of documentation, as well as multiple levels of approval and back and forth communication between a borrower and the financial institution.
- With the growth of digital technologies, competition for quality borrowers, who are in a sweet spot when selecting a lender, is fierce.
- Financial institutions that leverage the power of ecosystems, enable an end-to-end digital lending value chain, and have the right technological components such as process engines and APIfication capabilities, are bound to thrive in the new era of frictionless lending.
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Commercial lending in India
India is seeing increasing growth in commercial lending. However, the rise in loan value is concomitant with slower growth in origination volumes. This essentially implies that the ticket size in commercial loans is growing, consequently highlighting the potential for reputational risks that can harm the economy.
Financial institutions and central bank regulators are cognizant of this fact and have set measures that aid in accurately assessing applicants' creditworthiness.
Standardization and rigor in processes, risk mitigation
Commercial loan assessment has always been long-drawn. High-ticket loans require detailed assessment, multiple validations for authenticity/accuracy of documentation, as well as multiple levels of approvals and back and forth communication between a borrower and the financial institution. In fact, a recent survey points to gathering documents efficiently and consistently as the biggest (38.5%) obstacle in the commercial lending process.
The commercial loans segment broadly encompasses micro, small, medium, mid- and large-corporate businesses. Borrower constitution (sole proprietorship, individual, private limited, partnership, etc.) and type of loan products (term loans, working capital loans, leasing, channel financing, factoring, etc.) significantly impact the credit assessment value chain, the extent of credit checks, validations, and underwriting/approval cycles.
The more complex, the higher the turnaround time (TAT) for processing the application, impacting a borrower’s ability to secure timely credit for business needs. Survey indicate that more than 90% of commercial lending applications take more than a week to process, with 40% extending beyond a month. The higher TAT is attributable to manual steps, lack of seamless data sourcing, standardization and codification of credit policies, as well as regulatory compliance rules.
Financial institutions are not untouched by the increased TAT as they are equally at risk of losing customers to the competition. Not just velocity, they need to be able to competitively price loans considering internal profit measures such as RoE/RoA. A systemic and risk-weighted approach to pricing is vital to guarantee consistency and safeguard customer satisfaction in a market replete with neobanks, challengers, and fintech companies. In contrast, a recent industry report states that 31.7% of the FIs set prices either by discretion or borrowers’ ability to negotiate.
With digital being the new normal, competition for quality borrowers, who are in a sweet spot when selecting a lender, is fierce. Technology-enabled customer experience improvement (e.g., self-service journey enabled through a rich API set), as well as timely identification of problematic loans, appear to be the topmost priorities for financial institutions.
Automating decision-making and curating solutions for a frictionless end-user experience
Analogous to retail lending, commercial borrowers are also looking towards agile and nimble lenders/FIs who can provide a swift, frictionless experience.
Automation of credit processes, application data collation, and documentation are a few areas making inroads into commercial lending. The benefits of automation stretch beyond the reduction of TAT and efficiency into enforcing the standardization of processes, too. It eliminates redundant validations and helps in objective decision-making and exception tracking.
Making authentic data available to underwriters and decision-makers has also freed up the employee bandwidth of financial institutions. Bringing additional data dimensions such as information on liquidation resolutions and criminal cases (e.g., insolvency and tribulations’ database) or sector-specific analytics (e.g., real estate insights for construction finance) also ensures screening of problematic cases early on.
Recent strides by fintech organizations and central governments towards digital initiatives are pushing the boundaries of the art of the possible. For example, e-signatures have successfully proven to reduce contractual documentation time by up to 80%, expediting tasks that usually take a few days to hours. This also takes care of the stamp duty applicable to legal documentation, freeing up considerable time for front office and relationship managers to delve deeper into borrowers’ needs and strengthen relationships.
Compliance with statutory requirements/ internal credit policy is built into user experience/lending journeys. Simplified and automated lending assessment journeys using consent-based eKYC, credit bureau checks, bank statement analysis, and criminal and employment checks reduce TAT by up to 40%, cost of operations by up to 25%, and attract borrowers who wish to benefit from a hassle-free lending experience.
However, every FI has its own niche; therefore, origination solutions need to be flexible to adopt FI-specific credit policies and user journeys. This is applicable for the initial implementation of an automated origination solution and for subsequent rolling out of changes made to credit policies.
Flexibility to define and orchestrate credit processes (cutting across multiple departments) can help financial institutions set up efficient processes for new customers, renewals, and ad-hoc requests. The capability to orchestrate tasks between multiple departments allows for continuously identifying bottlenecks and changed processes/activities for further refinement. This includes business rules for credit approval and the agility to operate and implement changes without going through lengthy IT change management processes.
Multiple product configurations help them tap into expanding credit needs of borrowers - whether project finance/term loan, working capital needs such as bank guarantee, or a leasing product, while also opening up a broader spectrum of customers to service.
The origination platform must include comprehensive integration and collaboration capabilities to achieve the above synergies. Integration capabilities enable the institution to not just leverage the power of data inside, but also across the larger fintech ecosystem. A powerful technology architectural layer leveraging real-time integration protocols without relying on traditional end-of-day processes is required.
Faster time to market and growth in assets under management (AUM)
Digital technology reduces TAT, NPAs (Non-Performing Assets), and increases operational efficiency while improving the quality of assets manifold. Therefore, one may question whether lenders have to adopt digital frictionless journeys, instead of operating within the analog, siloed lending landscape. Financial institutions that leverage the power of ecosystems, enable an end-to-end digital lending value chain, and have the right technological components, such as process engines and APIfication capabilities, are bound to thrive in the new era of frictionless lending.
